Equibles

10-Q

PCB BANCORP (PCB)

10-Q 2022-11-03 For: 2022-09-30
View Original
Added on April 06, 2026

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                   to

Commission file number 001-38621

PCB BANCORP

(Exact name of registrant as specified in its charter)

California 20-8856755
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)

3701 Wilshire Boulevard, Suite 900, Los Angeles, California 90010

(Address of principal executive offices) (Zip Code)

(213) 210-2000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common stock, no par value PCB Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☒
Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company ☒
Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ☒

As of October 28, 2022, the registrant had outstanding 14,800,133 shares of common stock.

PCB Bancorp and Subsidiary

Quarterly Report on Form 10-Q

September 30, 2022

Table of Contents

Part I - Financial Information
Item 1. Consolidated Financial Statements 4
Consolidated Balance Sheets -September30, 2022 (Unaudited) and December 31, 2021 4
Consolidated Statements of Income (Unaudited) - Three andNineMonths EndedSeptember30, 2022 and 2021 5
Consolidated Statements of Comprehensive Income (Unaudited) -Three andNineMonths EndedSeptember30, 2022 and 2021 6
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) -Three andNineMonths EndedSeptember30, 2022 and 2021 7
Consolidated Statements of Cash Flows (Unaudited) -NineMonths EndedSeptember30, 2022 and 2021 9
Notes to Consolidated Financial Statements (Unaudited) 11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 38
Item 3. Quantitative and Qualitative Disclosures About Market Risk 63
Item 4. Controls and Procedures 64
Part II - Other Information
Item 1. Legal Proceedings 65
Item 1A. Risk Factors 65
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 65
Item 3. Defaults Upon Senior Securities 66
Item 4. Mine Safety Disclosures 66
Item 5. Other Information 66
Item 6. Exhibits 67
Signatures 68

Forward-looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements which reflect current views of PCB Bancorp, (collectively, with its consolidated subsidiary, the “Company,” “we,” “us” or “our”) with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “goal,” “target,” “aim,” “would,” and “annualized” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, but are not limited to, the following:

•business and economic conditions, particularly those affecting the financial services industry and our primary market areas and arising from recent inflationary pressures and governmental and societal responses thereto;

•our ability to successfully manage our credit risk and the sufficiency of our allowance for loan loss;

•factors that can impact the performance of our loan portfolio, including real estate values and liquidity in our primary market areas, the financial health of our commercial borrowers and the success of construction projects that we finance and our borrowers' actual payment performance as loan deferrals related to the COVID-19 pandemic expire;

•governmental monetary and fiscal policies, and changes in market interest rates;

•the current inflationary environment and government and regulatory responses thereto;

•compliance with governmental and regulatory requirements, including the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act of 2020, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Economic Growth, Regulatory Relief and Consumer Protection Act and others relating to banking, consumer protection, securities and tax matters including, but not limited to the potential adverse impact of loan modifications and payment deferrals implemented consistent with recent regulatory guidance;

•the significant portion of our loan portfolio that is comprised of real estate loans;

•our ability to attract and retain Korean-American customers;

•our ability to identify and address cyber-security risks, fraud and systems errors;

•our ability to effectively execute our strategic plan and manage our growth;

•changes in our senior management team and our ability to attract, motivate and retain qualified personnel;

•cyber-attacks, ransomware attacks, computer viruses or other malware that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage our systems;

•liquidity issues, including fluctuations in the fair value and liquidity of the securities we hold for sale and our ability to raise additional capital, if necessary;

•costs and obligations associated with operating as a public company;

•effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services;

•the effects of severe weather, natural disasters, acts of war or terrorism, health epidemics or pandemics (or expectations about them) and other external events on our business;

•the impact of any claims or legal actions to which we may be subject, including any effect on our reputation; and

•changes in federal tax law or policy.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements and the risks described under “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 and our other documents filed with the United States (“U.S.”) Securities Exchange Commission (“SEC”). Because of these risks and other uncertainties, our actual future results, performance or achievement, or industry results, may be materially different from the results indicated by the forward looking statements in this report. In addition, our past results of operations are not necessarily indicative of our future results. You should not rely on any forward looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. Any forward-looking statement speaks only as of the date on which it is initially made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

Item 1 - Consolidated Financial Statements

PCB Bancorp and Subsidiary

Consolidated Balance Sheets

($ in thousands, except share data)

September 30, 2022 December 31, 2021
(Unaudited)
Assets
Cash and due from banks $ 22,252 $ 15,222
Interest-bearing deposits in other financial institutions 131,786 188,063
Total cash and cash equivalents 154,038 203,285
Securities available-for-sale, at fair value 129,401 123,198
Loans held-for-sale 18,982 37,026
Loans held-for-investment, net of deferred loan costs (fees) 1,959,237 1,732,205
Allowance for loan losses (23,761) (22,381)
Net loans held-for-investment 1,935,476 1,709,824
Premises and equipment, net 4,671 3,098
Federal Home Loan Bank and other restricted stock, at cost 10,183 8,577
Bank-owned life insurance 29,883 29,358
Deferred tax assets, net 12,135 10,824
Servicing assets 7,627 7,269
Operating lease assets 6,897 6,786
Accrued interest receivable 6,070 5,368
Other assets 11,688 5,122
Total assets $ 2,327,051 $ 2,149,735
Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing demand $ 809,842 $ 830,383
Savings, NOW and money market accounts 563,000 422,526
Time deposits of $250,000 or less 305,985 341,956
Time deposits of more than $250,000 299,271 272,269
Total deposits 1,978,098 1,867,134
Federal Home Loan Bank advances — 10,000
Operating lease liabilities 7,402 7,444
Accrued interest payable and other liabilities 8,832 8,871
Total liabilities 1,994,332 1,893,449
Commitments and contingencies
Preferred stock, 10,000,000 shares authorized, no par value:
Series C, senior non-cumulative perpetual, $1,000 per share liquidation preference, 69,141 and 0 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively. 69,141 —
Common stock, 60,000,000 shares authorized, no par value; 14,853,140 and 14,865,825 shares issued and outstanding, respectively, and included 62,022 and 55,284 shares of unvested restricted stock, respectively, at September 30, 2022 and December 31, 2021 153,890 154,992
Retained earnings 120,699 101,140
Accumulated other comprehensive income (loss), net (11,011) 154
Total shareholders’ equity 332,719 256,286
Total liabilities and shareholders’ equity $ 2,327,051 $ 2,149,735

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Consolidated Statements of Income (Unaudited)

($ in thousands, except share and per share data)

Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Interest and dividend income:
Loans, including fees $ 24,835 $ 20,537 $ 66,268 $ 58,792
Tax-exempt investment securities 34 36 107 109
Taxable investment securities 772 401 1,843 1,063
Other interest-earning assets 1,194 194 1,957 513
Total interest income 26,835 21,168 70,175 60,477
Interest expense:
Deposits 2,798 885 4,689 3,196
Other borrowings 14 56 119 239
Total interest expense 2,812 941 4,808 3,435
Net interest income 24,023 20,227 65,367 57,042
Provision (reversal) for loan losses 3,753 (1,053) 2,453 (3,134)
Net interest income after provision (reversal) for loan losses 20,270 21,280 62,914 60,176
Noninterest income:
Service charges and fees on deposits 341 292 974 887
Loan servicing income 780 655 2,235 2,082
Bank-owned life insurance income 178 — 525 —
Gain on sale of loans 1,415 4,269 7,231 9,558
Other income 462 372 1,145 1,069
Total noninterest income 3,176 5,588 12,110 13,596
Noninterest expense:
Salaries and employee benefits 8,457 7,606 25,177 20,913
Occupancy and equipment 1,650 1,399 4,584 4,158
Professional fees 587 422 1,632 1,574
Marketing and business promotion 909 416 1,426 1,070
Data processing 427 391 1,272 1,164
Director fees and expenses 179 144 530 433
Regulatory assessments 150 12 438 399
Other expense 1,336 842 2,952 2,329
Total noninterest expense 13,695 11,232 38,011 32,040
Income before income taxes 9,751 15,636 37,013 41,732
Income tax expense 2,798 4,613 10,728 12,305
Net income $ 6,953 $ 11,023 $ 26,285 $ 29,427
Earnings per common share, basic $ 0.47 $ 0.74 $ 1.76 $ 1.94
Earnings per common share, diluted $ 0.46 $ 0.73 $ 1.73 $ 1.92
Weighted-average common shares outstanding, basic 14,877,879 14,779,707 14,869,997 15,090,989
Weighted-average common shares outstanding, diluted 15,088,089 15,031,558 15,126,863 15,298,065

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Consolidated Statements of Comprehensive Income (Unaudited)

($ in thousands)

Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Net income $ 6,953 $ 11,023 $ 26,285 $ 29,427
Other comprehensive loss:
Unrealized loss on securities available-for-sale arising during the period (6,255) (581) (15,839) (1,734)
Income tax benefit related to items of other comprehensive loss 1,844 170 4,674 510
Total other comprehensive loss, net of tax (4,411) (411) (11,165) (1,224)
Total comprehensive income $ 2,542 $ 10,612 $ 15,120 $ 28,203

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

($ in thousands, except share and per share data)

Three Months Ended
Shares Outstanding Shareholders’ Equity
Preferred Stock Common Stock Preferred Stock Common Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Total
Balance at July 1, 2021 — 14,854,315 $ — $ 154,796 $ 83,002 $ 1,143 $ 238,941
Comprehensive income (loss)
Net income — — — — 11,023 — 11,023
Other comprehensive loss, net of tax — — — — — (411) (411)
Issuance of restricted stock 1,800 — — — — —
Forfeiture of restricted stock (300) — — — — —
Restricted stock surrendered due to employee tax liability (231) (4) — — (4)
Repurchase of common stock — (33,935) (543) — — (543)
Share-based compensation expense — — — 116 — — 116
Stock options exercised — 19,977 — 253 — — 253
Cash dividends declared on common stock ($0.12 per share) — — — — (1,777) — (1,777)
Balance at September 30, 2021 — 14,841,626 $ — $ 154,618 $ 92,248 $ 732 $ 247,598
Balance at July 1, 2022 69,141 14,956,760 $ 69,141 $ 155,842 $ 115,992 $ (6,600) $ 334,375
Comprehensive income (loss)
Net income — — — — 6,953 — 6,953
Other comprehensive loss, net of tax — — — — — (4,411) (4,411)
Issuance of restricted stock — 2,700 — — — — —
Restricted stock surrendered due to employee tax liability — (429) — (8) — — (8)
Repurchase of common stock — (119,941) — (2,249) — — (2,249)
Share-based compensation expense — — — 135 — — 135
Stock options exercised — 14,050 — 170 — — 170
Cash dividends declared on common stock ($0.15 per share) — — — — (2,246) — (2,246)
Balance at September 30, 2022 69,141 14,853,140 $ 69,141 $ 153,890 $ 120,699 $ (11,011) $ 332,719

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

($ in thousands, except share and per share data)

Nine Months Ended
Shares Outstanding Shareholders’ Equity
Preferred Stock Common Stock Preferred Stock Common Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Total
Balance at January 1, 2021 — 15,385,878 $ — $ 164,140 $ 67,692 $ 1,956 $ 233,788
Comprehensive income (loss)
Net income — — — — 29,427 — 29,427
Other comprehensive loss, net of tax — — — — — (1,224) (1,224)
Issuance of restricted stock — 35,584 — — — — —
Forfeiture of restricted stock — (1,300) — — — — —
Restricted stock surrendered due to employee tax liability (231) (4) — — (4)
Repurchase of common stock — (680,269) — (10,876) — — (10,876)
Share-based compensation expense — — — 323 — — 323
Stock options exercised — 101,964 — 1,035 — — 1,035
Cash dividends declared on common stock ($0.32 per share) — — — — (4,871) — (4,871)
Balance at September 30, 2021 — 14,841,626 $ — $ 154,618 $ 92,248 $ 732 $ 247,598
Balance at January 1, 2022 — 14,865,825 $ — $ 154,992 $ 101,140 $ 154 $ 256,286
Comprehensive income (loss)
Net income — — — — 26,285 — 26,285
Other comprehensive loss, net of tax — — — — — (11,165) (11,165)
Issuance of preferred stock 69,141 — 69,141 — — — 69,141
Issuance of restricted stock — 27,700 — — — — —
Forfeiture of restricted stock — (200) — — — — —
Restricted stock surrendered due to employee tax liability — (429) (8) — — (8)
Repurchase of common stock — (119,941) — (2,249) — — (2,249)
Share-based compensation expense — — — 418 — — 418
Stock options exercised — 80,185 — 737 — — 737
Cash dividends declared on common stock ($0.45 per share) — — — — (6,726) — (6,726)
Balance at September 30, 2022 69,141 14,853,140 $ 69,141 $ 153,890 $ 120,699 $ (11,011) $ 332,719

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

($ in thousands)

Nine Months Ended September 30,
2022 2021
Cash flows from operating activities
Net income $ 26,285 $ 29,427
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation of premises and equipment 1,072 1,053
Net amortization of premiums on securities 307 811
Net accretion of discounts on loans (2,682) (2,689)
Net accretion of deferred loan fees (2,014) (4,662)
Amortization of servicing assets 1,584 1,496
Provision (reversal) for loan losses 2,453 (3,134)
Bank-owned life insurance income (525) —
Deferred tax expense 3,363 1,111
Stock-based compensation 418 323
Gain on sale of loans (7,231) (9,558)
Originations of loans held-for-sale (88,236) (126,774)
Proceeds from sales of and principal collected on loans held-for-sale 114,400 109,409
Change in accrued interest receivable and other assets (7,261) 3,191
Change in accrued interest payable and other liabilities (1,194) (315)
Net cash provided by (used in) operating activities 40,739 (311)
Cash flows from investing activities
Purchase of securities available-for-sale (41,099) (47,306)
Proceeds from maturities and paydowns of securities available-for-sale 18,750 32,186
Proceeds from sale of loans held-for-sale previously classified as held-for-investment 458 5,355
Net change in loans held-for-investment (226,849) (123,698)
Purchase of loans held-for-investment — (1,439)
Purchase of Federal Home Loan Bank stock (1,606) (130)
Proceeds from sale of other real estate owned 1,191 3,434
Purchases of premises and equipment (2,690) (315)
Net cash used in investing activities (251,845) (131,913)
Cash flows from financing activities
Net change in deposits 110,964 237,815
Repayment of long-term Federal Home Loan Bank advances (10,000) (70,000)
Stock options exercised 737 1,035
Restricted stock surrendered due to employee tax liability (8) (4)
Issuance of preferred stock 69,141 —
Repurchase of common stock (2,249) (10,876)
Cash dividends paid on common stock (6,726) (4,871)
Net cash provided by financing activities 161,859 153,099
Net increase (decrease) in cash and cash equivalents (49,247) 20,875
Cash and cash equivalents at beginning of period 203,285 194,098
Cash and cash equivalents at end of period $ 154,038 $ 214,973

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Consolidated Statements of Cash Flows, Continued (Unaudited)

($ in thousands)

Nine Months Ended September 30,
2022 2021
Supplemental disclosures of cash flow information:
Interest paid $ 4,559 $ 4,916
Income taxes paid 12,625 9,027
Supplemental disclosures of non-cash investment activities:
Loans transferred to loans held-for-sale $ 458 $ 5,351
Loans transferred to other real estate owned 151 905
Right of use assets obtained in exchange for lease obligations 2,007 1,247

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 1 - Basis of Presentation and Significant Accounting Policies

Nature of Operations

PCB Bancorp is a bank holding company whose subsidiary is PCB Bank (the “Bank”), which is a single operating segment. The Company changed its subsidiary name from Pacific City Bank to PCB Bank on August 25, 2022. As of September 30, 2022, the Bank operated 11 full-service branches in Los Angeles and Orange counties, California, two full-service branches in Bergen County, New Jersey, and one full-service branch in each of Dallas, Texas and Bayside, New York, and loan production offices (“LPOs”) in Artesia, California; Annandale, Virginia; Atlanta, Georgia; Bellevue, Washington; Aurora, Colorado; and Carrollton, Texas. The Bank offers a broad range of loans, deposits, and other products and services predominantly to small and middle market businesses and individuals.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared pursuant to Article 10 of SEC Regulation S-X and other SEC rules and regulations for reporting on the Quarterly Report on Form 10-Q. Accordingly, certain disclosures required by U.S. generally accepted accounting principles (“GAAP”) are not included herein. These interim statements should be read in conjunction with the audited consolidated financial statements and notes included in the Annual Report on Form 10-K for the year ended December 31, 2021 filed by the Company with the SEC. The December 31, 2021 balance sheet presented herein has been derived from the audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC, but does not include all of the disclosures required by GAAP for complete financial statements.

In the opinion of management of the Company, the accompanying unaudited interim consolidated financial statements reflect all of the adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the consolidated financial condition and consolidated results of operations as of the dates and for the periods presented. Certain reclassifications have been made in the prior period financial statements to conform to the current period presentation. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

Principles of Consolidation

The consolidated financial statements include the accounts of PCB Bancorp and its wholly owned subsidiary as of September 30, 2022 and December 31, 2021, and for the three and nine months ended September 30, 2022 and 2021. Significant inter-company accounts and transactions have been eliminated in consolidation. Unless the context requires otherwise, all references to the Company include its wholly owned subsidiary.

Significant Accounting Policies

The accounting and reporting policies of the Company are based upon GAAP and conform to predominant practices within the banking industry. The Company has not made any significant changes in its critical accounting policies from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC.

Use of Estimates in the Preparation of Financial Statements

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates are subject to change and such change could have a material effect on the consolidated financial statements. Actual results may differ from those estimates.

Adopted Accounting Pronouncements

During the nine months ended September 30, 2022, there were no significant accounting pronouncements applicable to the Company that became effective.

Recent Accounting Pronouncements Not Yet Adopted

The following is recently issued accounting pronouncements applicable to the Company that has not yet been adopted:

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments-Credit Losses (Topic 326).” The amendments in this ASU require that entities change the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model. Under this model, entities will estimate credit losses over the entire contractual term of the instrument from the date of initial recognition of that instrument. It includes financial assets such as loan receivables, held-to-maturity debt securities, net investment in leases that are not accounted for at fair value through net income, and certain off-balance sheet credit exposures. This ASU was effective for public business entities that are SEC filers for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. In 2019, the FASB amended this ASU, which delays the effective date to 2023 for certain SEC filers that are Smaller Reporting Companies, which would apply to the Company. The Company plans to adopt this ASU, as well as any subsequent ASUs related to this ASU, at the delayed effective date of January 1, 2023.

The Company has completed its parallel-run during the three months ended September 30, 2022. During the fourth quarter of 2022, the Company will continue to analyze model results, review qualitative factors, update the allowance documentation, and address any gaps arising from internal reviews, model validation, and implementation testing. Based on the Company’s current assessment of this ASU, the Company expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses which could potentially have a material impact on its consolidated financial statements as of the beginning of the first reporting period in which this ASU is effective.

In March 2022, the FASB issued ASU 2022-02, “Financial Instruments-Credit Losses (Topic 326) - Troubled Debt Restructuring and Vintage Disclosures.” The amendments in this ASU eliminates the accounting guidance for TDRs by creditors in ASC 310-40, “Receivables - Troubled Debt Restructurings by Creditors,” while enhancing disclosure requirements for restructurings involving borrowers that are experiencing financial difficulty. This Update also requires public business entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. The Company will adopt this ASU at January 1, 2023, the effective date of ASU 2016-13.

Note 2 - Fair Value Measurements

Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy, and expands disclosures about fair value measurements. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (i.e. an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The three-level fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are defined as follows:

•Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

•Level 2: Significant observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

•Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Fair value is measured on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. Additionally, fair value is used on a non-recurring basis to evaluate certain assets or liabilities for impairment or for disclosure purposes. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company records securities available-for-sale at fair value on a recurring basis. Certain other assets, such as loans held-for-sale, impaired loans, servicing assets and other real estate owned (“OREO”) are recorded at fair value on a non-recurring basis. Non-recurring fair value measurements typically involve assets that are periodically evaluated for impairment and for which any impairment is recorded in the period in which the re-measurement is performed. The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:

Investment securities: The fair values of securities available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1) or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2). Management reviews the valuation techniques and assumptions used by the provider and determines that the provider uses widely accepted valuation techniques based on observable market inputs appropriate for the type of security being measured. Securities held-to-maturity are not measured at fair value on a recurring basis.

Loans held-for-sale: The Company records SBA loans held-for-sale, residential property loans held-for-sale and certain non-residential real estate loans held-for-sale at the lower of cost or fair value, on an aggregate basis. The Company obtains fair values from a third party independent valuation service provider. Loans held-for-sale accounted for at the lower of cost or fair value are considered to be recognized at fair value when they are recorded at below cost, on an aggregate basis, and are classified as Level 2.

Impaired loans: Certain collateral-dependent impaired loans are recognized at fair value when they reflect partial write-downs, through charge-offs or specific reserve allowances, that are based on the current appraised or market-quoted value of the underlying collateral. In some cases, the properties for which market quotes or appraised values have been obtained are located in areas where comparable sales data is limited, outdated, or unavailable. Fair value estimates for collateral-dependent impaired loans are obtained from real estate brokers or other third-party consultants, and are classified as Level 3.

Other real estate owned: The Company initially records OREO at fair value at the time of foreclosure. Thereafter, OREO is recorded at the lower of cost or fair value based on their subsequent changes in fair value. The fair value of OREO is generally based on recent real estate appraisals adjusted for estimated selling costs. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments may be significant and result in a Level 3 classification due to the unobservable inputs used for determining fair value. Only OREO with a valuation allowance are considered to be carried at fair value.

Servicing Assets: Servicing assets represent the value associated with servicing loans that have been sold. The fair value for servicing assets is determined through discounted cash flow analysis and utilizes discount rates and prepayment speed assumptions as inputs. All of these assumptions require a significant degree of management estimation and judgment. The fair market valuation is performed on a quarterly basis for servicing assets. Servicing assets are accounted for at the lower of cost or market value and considered to be recognized at fair value when they are recorded at below cost and are classified as Level 3.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of dates indicated:

Fair Value Measurement Level
($ in thousands) Quoted Prices in Active Markets for Identical Assets<br><br>(Level 1) Significant Other Observable Inputs<br>(Level 2) Significant Unobservable Inputs<br>(Level 3) Total
September 30, 2022
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities $ — $ 88,302 $ — $ 88,302
Residential collateralized mortgage obligations — 22,701 — 22,701
SBA loan pool securities — 9,816 — 9,816
Municipal bonds — 4,020 — 4,020
Corporate bonds — 4,562 — 4,562
Total securities available-for-sale — 129,401 — 129,401
Total assets measured at fair value on a recurring basis $ — $ 129,401 $ — $ 129,401
Total liabilities measured at fair value on a recurring basis $ — $ — $ — $ —
December 31, 2021
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities $ — $ 84,713 $ — $ 84,713
Residential collateralized mortgage obligations — 19,056 — 19,056
SBA loan pool securities — 8,672 — 8,672
Municipal bonds — 5,686 — 5,686
Corporate bonds — 5,071 — 5,071
Total securities available-for-sale — 123,198 — 123,198
Total assets measured at fair value on a recurring basis $ — $ 123,198 $ — $ 123,198
Total liabilities measured at fair value on a recurring basis $ — $ — $ — $ —

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

The following table presents the Company’s assets and liabilities measured at fair value on a non-recurring basis as of dates indicated:

Fair Value Measurement Level
($ in thousands) Quoted Prices in Active Markets for Identical Assets<br><br>(Level 1) Significant Other Observable Inputs<br>(Level 2) Significant Unobservable Inputs<br>(Level 3) Total
September 30, 2022
Impaired loans:
Commercial lines of credit $ — $ — $ 4,000 $ 4,000
Total impaired loans — — 4,000 4,000
Total assets measured at fair value on a non-recurring basis $ — $ — $ 4,000 $ 4,000
Total liabilities measured at fair value on a non-recurring basis $ — $ — $ — $ —
December 31, 2021
Impaired loans:
SBA property $ — $ — $ 17 $ 17
Total impaired loans — — 17 17
Total assets measured at fair value on a non-recurring basis $ — $ — $ 17 $ 17
Total liabilities measured at fair value on a non-recurring basis $ — $ — $ — $ —

The following table presents quantitative information about level 3 fair value measurements for assets measured at fair value on a non-recurring basis as of the date indicated:

($ in thousands) Fair Value Valuation Technique(s) Unobservable Input(s) Range (Weighted-Average)
September 30, 2022
Impaired loans:
Commercial lines of credit $ 4,000 Pending Sales Agreement NM NM
December 31, 2021
Impaired loans:
SBA property $ 17 Fair value of collateral NM NM

For assets measured at fair value, the following table presents the total net gains (losses), which include charge-offs, recoveries, and specific reserves recorded for the periods indicated:

Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands) 2022 2021 2022 2021
Collateral dependent impaired loans:
SBA property $ — $ — $ — $ (2)
Commercial lines of credit — — — 136
SBA commercial term — — — (5)
Other real estate owned 152 — 152 74
Net gains (losses) recognized $ 152 $ — $ 152 $ 203

Fair Value of Financial Instruments

The following table presents the carrying value and estimated fair values of financial assets and liabilities as of the dates indicated:

Fair Value Fair Value Measurements
( in thousands) Level 1 Level 2 Level 3
September 30, 2022
Financial assets:
Interest-bearing deposits in other financial institutions 131,786 $ 131,786 $ 131,786 $ — $ —
Securities available-for-sale 129,401 — 129,401 —
Loans held-for-sale 20,396 — 20,396 —
Net loans held-for-investment 1,895,488 — — 1,895,488
Federal Home Loan Bank (“FHLB”) and other restricted stock N/A N/A N/A N/A
Accrued interest receivable 6,070 90 334 5,646
Financial liabilities:
Deposits 1,978,098 $ 1,971,950 $ — $ — $ 1,971,950
Accrued interest payable 1,020 — — 1,020
December 31, 2021
Financial assets:
Interest-bearing deposits in other financial institutions 188,063 $ 188,063 $ 188,063 $ — $ —
Securities available-for-sale 123,198 — 123,198 —
Loans held-for-sale 41,079 — 41,079 —
Net loans held-for-investment 1,725,022 — — 1,725,022
FHLB and other restricted stock N/A N/A N/A N/A
Accrued interest receivable 5,368 1 337 5,030
Financial liabilities:
Deposits 1,867,134 $ 1,867,635 $ — $ — $ 1,867,635
FHLB advances 10,087 — 10,087 —
Accrued interest payable 771 — 1 770

All values are in US Dollars.

Note 3 - Investment Securities

The following table presents the amortized cost and fair value of the securities available-for-sale as of the dates indicated:

($ in thousands) Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Fair Value
September 30, 2022
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities $ 101,233 $ 1 $ (12,932) $ 88,302
Residential collateralized mortgage obligations 24,486 8 (1,793) 22,701
SBA loan pool securities 10,244 14 (442) 9,816
Municipal bonds 4,264 1 (245) 4,020
Corporate bonds 5,000 — (438) 4,562
Total securities available-for-sale $ 145,227 $ 24 $ (15,850) $ 129,401
December 31, 2021
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities $ 85,346 $ 625 $ (1,258) $ 84,713
Residential collateralized mortgage obligations 18,990 113 (47) 19,056
SBA loan pool securities 8,520 156 (4) 8,672
Municipal bonds 5,329 357 — 5,686
Corporate bonds 5,000 71 — 5,071
Total securities available-for-sale $ 123,185 $ 1,322 $ (1,309) $ 123,198

As of September 30, 2022 and December 31, 2021, pledged securities were $66.4 million and $110.9 million, respectively. These securities were pledged for the State Deposit from the California State Treasurer.

The following table presents the amortized cost and fair value of the securities available-for-sale by contractual maturity as of the date indicated. Expected maturities may differ from contractual maturities, if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

September 30, 2022
($ in thousands) Amortized Cost Fair Value
Within one year $ 963 $ 952
One to five years 871 865
Five to ten years 5,081 4,637
Greater than ten years 2,349 2,128
Residential mortgage-backed securities, residential collateralized mortgage obligations and SBA loan pool securities 135,963 120,819
Total $ 145,227 $ 129,401

The following table presents proceeds from sales and calls of securities available-for-sale and the associated gross gains and losses realized through earnings upon the sales and calls of securities available-for-sale for the periods indicated:

Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands) 2022 2021 2022 2021
Gross realized gains on sales and calls of securities available-for-sale $ — $ — $ — $ —
Gross realized losses on sales and calls of securities available-for-sale — — — —
Net realized gains (losses) on sales and calls of securities available-for-sale $ — $ — $ — $ —
Proceeds from sales and calls of securities available-for-sale $ 1,040 $ — $ 1,040 $ —
Tax expense on sales and calls of securities available-for-sale $ — $ — $ — $ —

The following table summarizes the investment securities with unrealized losses by security type and length of time in a continuous unrealized loss position as of the dates indicated:

Length of Time that Individual Securities Have Been In a Continuous Unrealized Loss Position
Less Than 12 Months 12 Months or Longer Total
($ in thousands) Fair Value Gross Unrealized Losses Number of Securities Fair Value Gross Unrealized Losses Number of Securities Fair Value Gross Unrealized Losses Number of Securities
September 30, 2022
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities $ 45,595 $ (4,591) 82 $ 42,667 $ (8,341) 32 $ 88,262 $ (12,932) 114
Residential collateralized mortgage obligations 14,956 (1,348) 35 1,701 (445) 2 16,657 (1,793) 37
SBA loan pool securities 6,233 (441) 11 83 (1) 1 6,316 (442) 12
Municipal bonds 3,520 (245) 12 — — — 3,520 (245) 12
Corporate bonds 4,562 (438) 1 — — — 4,562 (438) 1
Total securities available-for-sale $ 74,866 $ (7,063) 141 $ 44,451 $ (8,787) 35 $ 119,317 $ (15,850) 176
December 31, 2021
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities $ 46,945 $ (931) 32 $ 8,885 $ (327) 5 $ 55,830 $ (1,258) 37
Residential collateralized mortgage obligations 2,897 (47) 4 — — — 2,897 (47) 4
SBA loan pool securities — — — 156 (4) 1 156 (4) 1
Total securities available-for-sale $ 49,842 $ (978) 36 $ 9,041 $ (331) 6 $ 58,883 $ (1,309) 42

The Company performs an other-than-temporary impairment (“OTTI”) assessment at least on a quarterly basis. OTTI is recognized when fair value is below the amortized cost where: (i) an entity has the intent to sell the security; (ii) it is more likely than not that an entity will be required to sell the security before recovery of its amortized cost basis; or (iii) an entity does not expect to recover the entire amortized cost basis of the security.

All individual securities in a continuous unrealized loss position for 12 months or more as of September 30, 2022 and December 31, 2021 had an investment grade rating upon purchase. The issuers of these securities have not established any cause for default on these securities and various rating agencies have reaffirmed their long-term investment grade status as of September 30, 2022 and December 31, 2021. These securities have fluctuated in value since their purchase dates as market interest rates fluctuated. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell before the recovery of its amortized cost basis. The Company determined that the investment securities with unrealized losses for twelve months or more are not other-than-temporary impaired, and, therefore, no impairment was recognized during the three and nine months ended September 30, 2022 and 2021.

Note 4 - Loans and Allowance for Loan Losses

Loans Held-For-Investment

The following table presents, by recorded investment, the composition of the Company’s loans held-for-investment (net of deferred fees and costs) as of the dates indicated:

($ in thousands) September 30, 2022 December 31, 2021
Real estate loans:
Commercial property $ 1,271,781 $ 1,105,843
Residential property 297,506 209,485
SBA property 136,088 129,661
Construction 14,592 8,252
Total real estate loans 1,719,967 1,453,241
Commercial and industrial loans:
Commercial term 80,225 73,438
Commercial lines of credit 117,960 100,936
SBA commercial term 16,542 17,640
SBA PPP 1,309 65,329
Total commercial and industrial loans 216,036 257,343
Other consumer loans 23,234 21,621
Loans held-for-investment 1,959,237 1,732,205
Allowance for loan losses (23,761) (22,381)
Net loans held-for-investment $ 1,935,476 $ 1,709,824

The Company had no loans under modified terms related to the COVID-19 pandemic as of September 30, 2022 and December 31, 2021.

In the ordinary course of business, the Company may grant loans to certain officers and directors, and the companies with which they are associated. As of September 30, 2022 and December 31, 2021, the Company had $114 thousand and $398 thousand, respectively, of such loans outstanding.

Allowance for Loan Losses

The following tables present the activities in allowance for loan losses by portfolio segment, which is consistent with the Company’s methodology for determining allowance for loan losses, for the periods indicated:

($ in thousands) Real Estate Commercial and Industrial Other Consumer Total
Balance at July 1, 2022 $ 16,591 $ 4,275 $ 205 $ 21,071
Charge-offs — (1,078) (34) (1,112)
Recoveries on loans previously charged off — 21 28 49
Provision for loan losses 1,758 1,966 29 3,753
Balance at September 30, 2022 $ 18,349 $ 5,184 $ 228 $ 23,761
Balance at July 1, 2021 $ 18,672 $ 5,866 $ 351 $ 24,889
Charge-offs — (84) (43) (127)
Recoveries on loans previously charged off — 94 4 98
Provision (reversal) for loan losses (733) (336) 16 (1,053)
Balance at September 30, 2021 $ 17,939 $ 5,540 $ 328 $ 23,807 ($ in thousands) Real Estate Commercial and Industrial Other Consumer Total
--- --- --- --- --- --- --- --- ---
Balance at January 1, 2022 $ 16,797 $ 5,310 $ 274 $ 22,381
Charge-offs — (1,095) (76) (1,171)
Recoveries on loans previously charged off — 44 54 98
Provision (reversal) for loan losses 1,552 925 (24) 2,453
Balance at September 30, 2022 $ 18,349 $ 5,184 $ 228 $ 23,761
Balance at January 1, 2021 $ 18,894 $ 7,222 $ 394 $ 26,510
Charge-offs (18) (100) (87) (205)
Recoveries on loans previously charged off 47 553 36 636
Reversal for loan losses (984) (2,135) (15) (3,134)
Balance at September 30, 2021 $ 17,939 $ 5,540 $ 328 $ 23,807

The following table presents the information on allowance for loan losses and recorded investments by portfolio segment and impairment methodology as of the dates indicated:

($ in thousands) Real Estate Commercial and Industrial Other Consumer Total
September 30, 2022
Allowance for loan losses:
Individually evaluated for impairment $ — $ — $ — $ —
Collectively evaluated for impairment 18,349 5,184 228 23,761
Total $ 18,349 $ 5,184 $ 228 $ 23,761
Loans receivable:
Individually evaluated for impairment $ 3,910 $ 4,003 $ — $ 7,913
Collectively evaluated for impairment 1,716,057 212,033 23,234 1,951,324
Total $ 1,719,967 $ 216,036 $ 23,234 $ 1,959,237
December 31, 2021
Allowance for loan losses:
Individually evaluated for impairment $ — $ — $ — $ —
Collectively evaluated for impairment 16,797 5,310 274 22,381
Total $ 16,797 $ 5,310 $ 274 $ 22,381
Loans receivable:
Individually evaluated for impairment $ 1,314 $ 221 $ — $ 1,535
Collectively evaluated for impairment 1,451,927 257,122 21,621 1,730,670
Total $ 1,453,241 $ 257,343 $ 21,621 $ 1,732,205

Credit Quality Indicators

The Company classifies loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans in regards to credit risk. This analysis typically includes non-homogeneous loans, such as commercial property and commercial and industrial loans, and is performed on an ongoing basis as new information is obtained. The Company uses the following definitions for risk ratings:

Pass - Loans classified as pass include non-homogeneous loans not meeting the risk ratings defined below and smaller, homogeneous loans not assessed on an individual basis.

Special Mention - Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

The following table presents the risk categories for the recorded investment in loans by portfolio segment as of dates indicated:

($ in thousands) Pass Special Mention Substandard Doubtful Total
September 30, 2022
Real estate loans:
Commercial property $ 1,265,366 $ 3,283 $ 3,132 $ — $ 1,271,781
Residential property 297,134 — 372 — 297,506
SBA property 134,133 248 1,707 — 136,088
Construction 14,592 — — — 14,592
Commercial and industrial loans:
Commercial term 77,855 1,355 1,015 — 80,225
Commercial lines of credit 112,859 1,100 4,001 — 117,960
SBA commercial term 16,501 — 41 — 16,542
SBA PPP 1,309 — — — 1,309
Other consumer loans 23,209 — 25 — 23,234
Total $ 1,942,958 $ 5,986 $ 10,293 $ — $ 1,959,237
December 31, 2021
Real estate loans:
Commercial property $ 1,092,253 $ 11,739 $ 1,851 $ — $ 1,105,843
Residential property 209,485 — — — 209,485
SBA property 127,518 251 1,892 — 129,661
Construction 8,252 — — — 8,252
Commercial and industrial loans:
Commercial term 68,626 3,698 1,114 — 73,438
Commercial lines of credit 98,785 2,151 — — 100,936
SBA commercial term 17,111 253 276 — 17,640
SBA PPP 65,329 — — — 65,329
Other consumer loans 21,586 — 35 — 21,621
Total $ 1,708,945 $ 18,092 $ 5,168 $ — $ 1,732,205

Past Due and Nonaccrual Loans

The following table presents the aging of past due recorded investment in accruing loans and nonaccrual loans by portfolio segment as of dates indicated:

Still Accruing
($ in thousands) 30 to 59 Days Past Due 60 to 89 Days Past Due 90 or More Days Past Due Nonaccrual Total Past Due and Nonaccrual
September 30, 2022
Real estate loans:
Commercial property $ — $ — $ — $ 2,444 $ 2,444
Residential property — — — 372 372
SBA property 50 192 — 552 794
Commercial and industrial loans:
Commercial term — — — 3 3
Commercial lines of credit — — — 4,000 4,000
SBA commercial term 3 — — — 3
Other consumer loans 162 3 — 25 190
Total $ 215 $ 195 $ — $ 7,396 $ 7,806
December 31, 2021
Real estate loans:
Residential property $ 461 $ — $ — $ — $ 461
SBA property — — — 746 746
Commercial and industrial loans:
SBA commercial term — — — 213 213
Other consumer loans 88 5 — 35 128
Total $ 549 $ 5 $ — $ 994 $ 1,548

There were no nonaccrual loans guaranteed by a U.S. government agency at September 30, 2022 and December 31, 2021. The increase in nonaccrual loans was primarily due to single credit relationship.

Impaired Loans

The following table presents loans individually evaluated for impairment by portfolio segment as of the dates indicated. The recorded investment presents customer balances net of any partial charge-offs recognized on the loans and net of any deferred fees and costs.

With No Allowance Recorded With an Allowance Recorded
($ in thousands) Recorded Investment Unpaid Principal Balance Recorded Investment Unpaid Principal Balance Related Allowance
September 30, 2022
Real estate loans:
Commercial property $ 2,776 $ 2,772 $ — $ — $ —
Residential property 387 372 — — —
SBA property 778 812 — — —
Commercial and industrial loans:
Commercial term 3 3 — — —
Commercial lines of credit 4,034 5,074 — — —
Total $ 7,978 $ 7,959 $ — $ — $ —
December 31, 2021
Real estate loans:
Commercial property $ 326 $ 325 $ — $ — $ —
SBA property 988 1,033 — — —
Commercial and industrial loans:
Commercial term 2 2 — — —
SBA commercial term 219 227 — — —
Total $ 1,535 $ 1,587 $ — $ — $ —

The following tables present information on the recorded investment in impaired loans by portfolio segment for the periods indicated:

Three Months Ended September 30,
2022 2021
($ in thousands) Average Recorded Investment Interest Income Average Recorded Investment Interest Income
Real estate loans:
Commercial property $ 2,772 $ 5 $ 329 $ 6
Residential property 225 — — —
SBA property 783 4 1,026 3
Commercial and industrial loans:
Commercial term — — 8 —
Commercial lines of credit 4,537 — — —
SBA commercial term 95 — 327 —
Total $ 8,412 $ 9 $ 1,690 $ 9 Nine Months Ended September 30,
--- --- --- --- --- --- --- --- ---
2022 2021
($ in thousands) Average Recorded Investment Interest Income Average Recorded Investment Interest Income
Real estate loans:
Commercial property $ 1,140 $ 16 $ 330 $ 17
Residential property 381 — — —
SBA property 881 10 1,140 13
Commercial and industrial loans:
Commercial term — — 12 —
Commercial lines of credit 1,512 — — —
SBA commercial term 168 — 410 1
Total $ 4,082 $ 26 $ 1,892 $ 31

The following presents a summary of interest foregone on impaired loans for the periods indicated:

Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands) 2022 2021 2022 2021
Interest income that would have been recognized had impaired loans performed in accordance with their original terms $ 109 $ 23 $ 159 $ 78
Less: interest income recognized on impaired loans on a cash basis (9) (9) (26) (31)
Interest income foregone on impaired loans $ 100 $ 14 $ 133 $ 47

Troubled Debt Restructurings

The following table presents the composition of loans that were modified as TDRs by portfolio segment as of the dates indicated:

September 30, 2022 December 31, 2021
($ in thousands) Accruing Nonaccrual Total Accruing Nonaccrual Total
Real estate loans:
Commercial property $ 320 $ — $ 320 $ 326 $ — $ 326
SBA property 222 7 229 242 17 259
Commercial and industrial loans:
Commercial term — — — 2 — 2
SBA commercial term — — — 6 — 6
Total $ 542 $ 7 $ 549 $ 576 $ 17 $ 593

There were no new loans that were modified as TDRs for the three and nine months ended September 30, 2022 and 2021.

The Company had no commitments to lend to customers with outstanding loans that were classified as TDRs as of September 30, 2022 and December 31, 2021.

The determination of the allowance for loan losses related to TDRs depends on the collectability of principal and interest, according to the modified repayment terms. Loans that were modified as TDRs were individually evaluated for impairment and the Company allocated no allowance for loan losses as of September 30, 2022 and December 31, 2021.

There were no loans that were modified as TDRs for which there was a payment default within twelve months following the modification during the three and nine months ended September 30, 2022 and 2021.

Purchases, Sales, and Transfers

The following table presents a summary of loans held-for-investment transferred to loans held-for-sale for the periods indicated:

Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands) 2022 2021 2022 2021
Real estate loans:
Commercial property $ — $ 3,452 $ — $ 5,162
Residential property 458 — 458 189
Total $ 458 $ 3,452 $ 458 $ 5,351

The Company had no loans that were transferred from loans held-for-sale to loans held-for investment during the three and nine months ended September 30, 2022 and 2021.

The following table presents a summary of purchases of loans held-for-investment for the periods indicated:

Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands) 2022 2021 2022 2021
Real estate loans:
Residential property $ — $ 803 $ — $ 1,439
Total $ — $ 803 $ — $ 1,439

Loans Held-For-Sale

The following table presents a composition of loans held-for-sale as of the dates indicated:

($ in thousands) September 30, 2022 December 31, 2021
Real estate loans:
SBA property $ 15,981 $ 33,603
Commercial and industrial loans:
SBA commercial term 3,001 3,423
Total $ 18,982 $ 37,026

Loans held-for-sale are carried at the lower of cost or fair value. When a determination is made at the time of commitment to originate as held-for-investment, it is the Company’s intent to hold these loans to maturity or for the “foreseeable future,” subject to periodic reviews under the Company’s management evaluation processes, including asset/liability management and credit risk management. When the Company subsequently changes its intent to hold certain loans, the loans are transferred to held-for-sale at the lower of cost or fair value. Certain loans are transferred to held-for-sale with write-downs to allowance for loan losses.

Note 5 - Servicing Assets

At September 30, 2022 and December 31, 2021, total servicing assets were $7.6 million and $7.3 million, respectively. The Company sells SBA loans and certain residential property loans with servicing retained. The Company sold loans of $27.3 million and $45.0 million, respectively, with the servicing rights retained and recognized a net gain on sale of $1.4 million and $4.3 million, respectively, during the three months ended September 30, 2022 and 2021. During the nine months ended September 30, 2022 and 2021, the Company sold loans of $105.4 million and $90.1 million, respectively, with the servicing rights retained and recognized a net gain on sale of $7.2 million and $9.4 million, respectively. Loan servicing income was $780 thousand and $655 thousand for the three months ended September 30, 2022 and 2021. For the nine months ended September 30, 2022 and 2021, loan servicing income was $2.2 million and $2.1 million, respectively.

The following table presents the composition of servicing assets with key assumptions used to estimate the fair value as of the dates indicated:

September 30, 2022 December 31, 2021
($ in thousands) Residential Property SBA Property SBA Commercial Term Residential Property SBA Property SBA Commercial Term
Carrying amount $ 66 $ 7,106 $ 455 $ 86 $ 6,701 $ 482
Fair value $ 106 $ 9,144 $ 634 $ 126 $ 11,196 $ 734
Discount rate 7.73 % 11.47 % 12.55 % 6.33 % 8.75 % 9.64 %
Prepayment speed 20.90 % 14.89 % 16.68 % 24.40 % 9.80 % 12.77 %
Weighted average remaining life 21.0 years 21.5 years 6.6 years 21.9 years 21.4 years 6.2 years
Underlying loans being serviced $ 13,497 $ 469,507 $ 55,900 $ 17,443 $ 442,424 $ 59,839

The following tables present activity in servicing assets for the periods indicated:

Three Months Ended September 30,
2022 2021
($ in thousands) Residential Property SBA Property SBA Commercial Term Residential Property SBA Property SBA Commercial Term
Balance at beginning of period $ 72 $ 7,193 $ 451 $ 96 $ 5,800 $ 586
Additions — 370 64 — 1,040 13
Amortization (6) (457) (60) (9) (442) (75)
Balance at end of period $ 66 $ 7,106 $ 455 $ 87 $ 6,398 $ 524 Nine Months Ended September 30,
--- --- --- --- --- --- --- --- --- --- --- --- ---
2022 2021
($ in thousands) Residential Property SBA Property SBA Commercial Term Residential Property SBA Property SBA Commercial Term
Balance at beginning of period $ 86 $ 6,701 $ 482 $ 109 $ 5,642 $ 649
Additions — 1,784 158 — 2,021 84
Amortization (20) (1,379) (185) (22) (1,265) (209)
Balance at end of period $ 66 $ 7,106 $ 455 $ 87 $ 6,398 $ 524

Note 6 - Other Real Estate Owned

The following table presents activity in OREO for the periods indicated:

Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands) 2022 2021 2022 2021
Balance at beginning of period $ 808 $ — $ — $ 1,401
Additions — — 808 1,960
Sales (808) — (808) (3,361)
Net change in valuation allowance — — — —
Balance at end of period $ — $ — $ — $ —

The following table presents activity in OREO valuation allowance for the periods indicated:

Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands) 2022 2021 2022 2021
Balance at beginning of period $ — $ — $ — $ —
Additions — — — —
Net direct write-downs and removal from sale — — — —
Balance at end of period $ — $ — $ — $ —

The following table presents expenses related to OREOs for the periods indicated:

Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands) 2022 2021 2022 2021
Net gain on sales $ (152) $ — $ (152) $ (73)
Operating expenses, net of rental income 10 — 13 81
Total $ (142) $ — $ (139) $ 8

The Company did not provide loans to finance the sale of its OREO property during the three and nine months ended September 30, 2022 or 2021.

Note 7 - Operating Leases

The following table presents operating lease cost and supplemental cash flow information related to leases for the periods indicated:

Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands) 2022 2021 2022 2021
Operating lease cost (1) $ 705 $ 611 $ 2,029 $ 1,913
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 755 $ 654 $ 2,182 $ 2,051
Right of use assets obtained in exchange for lease obligations $ 1,043 $ 1,111 $ 2,007 $ 1,247

(1)    Included in Occupancy and Equipment on the Consolidated Statements of Income (Unaudited).

The Company used the incremental borrowing rate based on the information available at lease commencement in determining the present value of lease payments. The following table presents supplemental balance sheet information related to leases as of the dates indicated:

($ in thousands) September 30, 2022 December 31, 2021
Operating leases:
Operating lease assets $ 6,897 $ 6,786
Operating lease liabilities $ 7,402 $ 7,444
Weighted-average remaining lease term 4.4 years 4.0 years
Weighted-average discount rate 2.60 % 2.36 %

The following table presents maturities of operating lease liabilities as of the date indicated:

($ in thousands) September 30, 2022
Maturities:
2022 $ 787
2023 2,668
2024 1,237
2025 1,146
2026 860
After 2026 1,267
Total lease payment 7,965
Imputed Interest (563)
Present value of operating lease liabilities $ 7,402

Note 8 - Federal Home Loan Bank Advances and Other Borrowings

FHLB Advances

The Company had no outstanding FHLB advance of September 30, 2022. At December 31, 2021, the Company had a fixed interest rate FHLB advance of $10.0 million with a maturity date of June 29, 2022 (original maturity term of five years) and an interest rate of 2.07%. The Bank repaid the advance upon maturity.

At September 30, 2022 and December 31, 2021, loans pledged to secure borrowings from the FHLB were $1.08 billion and $982.7 million, respectively. The Company’s investment in capital stock of the FHLB of San Francisco totaled $10.0 million and $8.4 million at September 30, 2022 and December 31, 2021, respectively. The Company had additional borrowing capacity of $586.1 million and $516.2 million from the FHLB as of September 30, 2022 and December 31, 2021, respectively.

Other Borrowing Arrangements

At September 30, 2022, the Company had $29.1 million of unused borrowing capacity from the Federal Reserve Discount Window, to which the Company pledged loans with a carrying value of $37.4 million with no outstanding borrowings. In addition, the Company may borrow up to approximately $65.0 million overnight federal funds lines with correspondent financial institutions at September 30, 2022.

Note 9 - Shareholders’ Equity

Series C, Senior Non-Cumulative Perpetual Preferred Stock

On May 24, 2022, the Company issued 69,141 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series C, liquidation preference of $1,000 per share (“Series C Preferred Stock”) for the capital investment of $69.1 million from the U.S. Treasury under the Emergency Capital Investment Program (“ECIP”). ECIP investment is treated as tier 1 capital for the regulatory capital treatment.

The Series C Preferred Stock bears no dividend for the first 24 months following the investment date. Thereafter, the dividend rate will be adjusted based on the lending growth criteria listed in the terms of the ECIP investment with the annual dividend rate up to 2%. After the tenth anniversary of the investment date, the dividend rate will be fixed based on average annual amount of lending in years 2 through 10. Dividends will be payable quarterly in arrears on March 15, June 15, September 15, and December 15.

The Series C Preferred Stock may be redeemed at the option of the Company on or after the fifth anniversary of issuance (or earlier in the event of loss of regulatory capital treatment), subject to the approval of the appropriate federal banking regulator and in accordance with the federal banking agencies’ regulatory capital regulations.

Stock Repurchase

On April 8, 2021, the Company’s Board of Directors approved a repurchase program authorizing the repurchase of up to 5% of the Company’s outstanding common stock as of the date of the board meeting, which represented 775,000 shares, through September 7, 2021. The Company repurchased and retired 680,269 shares of common stock at a weighted-average price of $15.99 per share, totaling $10.9 million under this repurchase program.

On July 28, 2022, the Company’s Board of Directors approved a repurchase program authorizing for the repurchase of up to 5% of the Company’s outstanding common stock as of the date of the board meeting, which represented 747,938 shares, through February 1, 2023. The Company repurchased and retired 119,941 shares of common stock at a weighted-average price of $18.75 per share, totaling $2.2 million under this repurchase program through September 30, 2022.

Note 10 - Share-Based Compensation

On July 25, 2013, the Company adopted the 2013 Equity Based Stock Compensation Plan (“2013 EBSC Plan”) approved by its shareholders to replace the 2003 Stock Option Plan. The 2013 EBSC Plan provides 1,114,446 shares of common stock for equity based compensation awards including incentive and non-qualified stock options and restricted stock awards. As of September 30, 2022, there were 411,670 shares available for future grants.

Share-Based Compensation Expense

The following table presents share-based compensation expense and the related tax benefits for the periods indicated:

Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands) 2022 2021 2022 2021
Share-based compensation expense related to:
Stock options $ 40 $ 52 $ 130 $ 130
Restricted stock awards 95 64 288 193
Total share-based compensation expense $ 135 $ 116 $ 418 $ 323
Related tax benefits $ 29 $ 21 $ 89 $ 62

The following table presents unrecognized share-based compensation expense as of the date indicated:

September 30, 2022
($ in thousands) Unrecognized Expense Weighted-Average Remaining Expected Recognition Period
Unrecognized share-based compensation expense related to:
Stock options $ 357 3.2 years
Restricted stock awards 846 3.0 years
Total unrecognized share-based compensation expense $ 1,203 3.0 years

Stock Options

The following tables represent stock option activity for the periods indicated:

Three Months Ended September 30, 2022
($ in thousands except per share data) Number of Shares Weighted-Average Exercise Price Per Share Weighted-Average Contractual Term Aggregated Intrinsic Value
Outstanding at beginning of period 595,637 $ 12.34 4.5 years $ 3,776
Exercised (14,050) $ 12.11 3.87 years
Outstanding at end of period 581,587 $ 12.35 4.26 years $ 3,469
Exercisable at end of period 480,587 $ 10.95 3.39 years $ 3,422 Nine Months Ended September 30, 2022
--- --- --- --- --- --- ---
($ in thousands except per share data) Number of Shares Weighted-Average Exercise Price Per Share Weighted-Average Contractual Term Aggregated Intrinsic Value
Outstanding at beginning of period 632,772 $ 11.47 4.54 years $ 6,641
Granted 30,000 $ 22.61 10.00 years
Exercised (80,185) $ 9.19 2.47 years
Forfeited (1,000) $ 15.50 5.53 years
Outstanding at end of period 581,587 $ 12.35 4.26 years $ 3,469
Exercisable at end of period 480,587 $ 10.95 3.39 years $ 3,422

The following table represents information regarding unvested stock options for the periods indicated:

Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022
Number of Shares Weighted-Average Exercise Price Per Share Number of Shares Weighted-Average Exercise Price Per Share
Outstanding at beginning of period 114,000 $ 18.63 107,099 $ 16.70
Granted — $ — 30,000 $ 22.61
Vested (13,000) $ 15.79 (35,099) $ 15.19
Forfeited — $ — (1,000) $ 15.50
Outstanding at end of period 101,000 $ 18.99 101,000 $ 18.99

Restricted Stock Awards

The following table represents RSA activity for the periods indicated:

Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022
Number of Shares Weighted-Average Grant Date Fair Value Per Share Number of Shares Weighted-Average Grant Date Fair Value Per Share
Outstanding at beginning of period 68,822 $ 16.51 55,284 $ 12.79
Granted 2,700 $ 18.95 27,700 $ 21.67
Vested (9,500) $ 16.67 (20,762) $ 13.25
Forfeited — $ — (200) $ 17.09
Outstanding at end of period 62,022 $ 16.59 62,022 $ 16.59

Note 11 - Income Taxes

Income tax expense was $2.8 million and $4.6 million, respectively, and the effective tax rate was 28.7% and 29.5%, respectively, for the three months ended September 30, 2022 and 2021. For the nine months ended September 30, 2022 and 2021, income tax expense was $10.7 million and $12.3 million, respectively, and the effective tax rate was 29.0% and 29.5%, respectively.

At September 30, 2022 and December 31, 2021, the Company had no unrecognized tax benefits or related accrued interest.

The Company and its subsidiaries are subject to U.S. federal and various state jurisdictions income tax examinations. As of September 30, 2022, the Company is no longer subject to examination by taxing authorities for tax years before 2018 for federal taxes and before 2017 for various state jurisdictions. The statute of limitations vary by state, and state taxes other than California have been minimal and immaterial to the Company’s financial results.

Note 12 - Earnings Per Share

The following table presents the computations of basic and diluted EPS for the periods indicated:

Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands, except per share) 2022 2021 2022 2021
Basic earnings per share:
Net income $ 6,953 $ 11,023 $ 26,285 $ 29,427
Less: income allocated to unvested restricted stock (30) (43) (120) (116)
Net income allocated to common stock $ 6,923 $ 10,980 $ 26,165 $ 29,311
Weighted-average total common shares outstanding 14,943,027 14,837,000 14,938,160 15,150,635
Less: weighted-average unvested restricted stock (65,148) (57,293) (68,163) (59,646)
Weighted-average common shares outstanding, basic 14,877,879 14,779,707 14,869,997 15,090,989
Basic earnings per share $ 0.47 $ 0.74 $ 1.76 $ 1.94
Diluted earnings per share:
Net income allocated to common stock $ 6,923 $ 10,980 $ 26,165 $ 29,311
Weighted-average common shares outstanding, basic 14,877,879 14,779,707 14,869,997 15,090,989
Diluted effect of stock options 210,210 251,851 256,866 207,076
Weighted-average common shares outstanding, diluted 15,088,089 15,031,558 15,126,863 15,298,065
Diluted earnings per share $ 0.46 $ 0.73 $ 1.73 $ 1.92

There were 65,000 and 50,000 stock options excluded in computing diluted EPS because they were anti-dilutive for three months ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022 and 2021, there were 65,000 and 104,000 stock options excluded in computing diluted EPS because they were anti-dilutive.

Note 13 - Commitments and Contingencies

In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of its customers. These financial commitments include commitments to extend credit and letters of credit. Those instruments involve to varying degrees, elements of credit, and interest rate risk not recognized in the Company’s consolidated financial statements.

The Company had the following outstanding financial commitments whose contractual amount represents credit risk as of the dates indicated:

September 30, 2022 December 31, 2021
($ in thousands) Fixed Rate Variable Rate Fixed Rate Variable Rate
Unused lines of credit $ 55,173 $ 199,565 $ 8,261 $ 160,739
Unfunded loan commitments 847 35,822 595 29,688
Standby letters of credit 3,093 1,701 3,078 1,431
Commercial letters of credit 112 190 91 524
Total $ 59,225 $ 237,278 $ 12,025 $ 192,382

Unfunded loan commitments are generally made for periods of 90 days or less, except for SBA loans that are generally made for periods of 180 days or less.

The Company’s exposure to loan loss in the event of nonperformance on commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for the loans reflected in the consolidated financial statements. The Company maintained a reserve for off-balance sheet items of $242 thousand and $214 thousand, respectively, at September 30, 2022 and December 31, 2021, in Accrued Interest Payable and Other Liabilities in the Consolidated Balance Sheets.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Company evaluates each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company is based on management’s credit evaluation of the customer.

Litigation

The Company is involved in various matters of litigation, which have arisen in the ordinary course of business. In the opinion of management, the disposition of pending matters of litigation will not have a material effect on the Company’s consolidated financial statements.

Network and Data Incident

On August 30, 2021, the Bank identified unusual activity on its network. The Bank responded promptly to disable the activity, investigate its source and monitor the Bank’s network. The Bank subsequently became aware of claims that it had been the target of a ransomware attack. On September 7, 2021, the Bank determined that an external actor had illegally accessed and/or acquired certain data on its network. The Bank has been working with third-party forensic investigators to understand the nature and scope of the incident and determine what information may have been accessed and/or acquired and who may have been impacted. The investigation revealed that this incident impacted certain files containing certain Bank customer information. Some of these files contained documents related to loan applications, such as tax returns, Form W-2 information of their employees, and payroll records. The Bank has notified all individuals identified as impacted, consistent with applicable laws. All impacted individuals were offered free Equifax Complete Premier credit monitoring and identify theft protection services. The Bank has notified law enforcement and appropriate authorities of the incident.

On December 16, 2021, a complaint based on the incident was filed in the Los Angeles County Superior Court seeking damages, injunctive relief, and equitable relief. The Bank expresses no opinion on the merits of the Matter and intends to answer, respond, and/or otherwise vigorously defend itself from the claims and causes of action asserted in the complaint to the fullest extent permitted by applicable law. Those defenses will be based in part on the fact that the Bank has implemented security procedures, practices, and a robust information security program pursuant to guidance from financial regulators.

The Company continues to monitor and evaluate the data incident for its magnitude and concomitant financial, legal or reputational consequences. During the year ended December 31, 2021, expenses associated with the data incident totaled $100 thousand, which represents the retention amount on its insurance claims. There were no additional expenses associated with the data incident during the three and nine months ended September 30, 2022.

Note 14 - Regulatory Matters

Under the final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (“Basel III rules”), the Bank must hold a capital conservation buffer of 2.50% above the adequately capitalized risk-based capital ratios. Management believes as of September 30, 2022 and December 31, 2021, the Bank met all capital adequacy requirements to which they are subject to. Based on changes to the Federal Reserve’s definition of a “Small Bank Holding Company” that increased the threshold to $3 billion in assets in August 2018, the Company is not currently subject to separate minimum capital measurements. At such time as the Company reaches the $3 billion asset level, it will again be subject to capital measurements independent of the Bank. For comparison purposes, the Company’s ratios are included in the following discussion as well, all of which would have exceeded the “well-capitalized” level had the Company been subject to separate capital minimums. The Company and the Bank’s capital conservation buffer was 9.19% and 10.02%, respectively, as of September 30, 2022, and 8.04% and 7.73%, respectively, as of December 31, 2021. Unrealized gain or loss on securities available-for-sale is not included in computing regulatory capital. The following table presents the regulatory capital amounts and ratios for the Company and the Bank as of dates indicated:

Actual Minimum Capital Requirement To Be Well Capitalized Under Prompt Corrective Provisions
($ in thousands) Amount Ratio Amount Ratio Amount Ratio
September 30, 2022
PCB Bancorp
Common tier 1 capital (to risk-weighted assets) $ 274,134 13.69 % $ 90,114 4.5 % N/A N/A
Total capital (to risk-weighted assets) 367,278 18.34 % 160,202 8.0 % N/A N/A
Tier 1 capital (to risk-weighted assets) 343,275 17.14 % 120,152 6.0 % N/A N/A
Tier 1 capital (to average assets) 343,275 14.74 % 93,152 4.0 % N/A N/A
PCB Bank
Common tier 1 capital (to risk-weighted assets) $ 336,853 16.82 % $ 90,111 4.5 % $ 130,160 6.5 %
Total capital (to risk-weighted assets) 360,856 18.02 % 160,196 8.0 % 200,246 10.0 %
Tier 1 capital (to risk-weighted assets) 336,853 16.82 % 120,147 6.0 % 160,196 8.0 %
Tier 1 capital (to average assets) 336,853 14.47 % 93,149 4.0 % 116,436 5.0 %
December 31, 2021
PCB Bancorp
Common tier 1 capital (to risk-weighted assets) $ 255,650 14.79 % $ 77,762 4.5 % N/A N/A
Total capital (to risk-weighted assets) 277,263 16.04 % 138,244 8.0 % N/A N/A
Tier 1 capital (to risk-weighted assets) 255,650 14.79 % 103,683 6.0 % N/A N/A
Tier 1 capital (to average assets) 255,650 12.11 % 84,445 4.0 % N/A N/A
PCB Bank
Common tier 1 capital (to risk-weighted assets) $ 250,145 14.48 % $ 77,761 4.5 % $ 112,321 6.5 %
Total capital (to risk-weighted assets) 271,757 15.73 % 138,241 8.0 % 172,801 10.0 %
Tier 1 capital (to risk-weighted assets) 250,145 14.48 % 103,681 6.0 % 138,241 8.0 %
Tier 1 capital (to average assets) 250,145 11.85 % 84,443 4.0 % 105,554 5.0 %

The California Financial Code provides that a bank may not make a cash distribution to its shareholders in excess of the lesser of the bank’s undivided profits or the bank’s net income for its last three fiscal years less the amount of any distribution made to the bank’s shareholder during the same period. As a California corporation, the Company is subject to the limitations of California law, which allows a corporation to distribute cash or property to shareholders, including a dividend or repurchase or redemption of shares, if the corporation meets either a retained earnings test or a balance sheet test. Under the retained earnings test, the Company may make a distribution from retained earnings to the extent that its retained earnings exceed the sum of (a) the amount of the distribution plus (b) the amount, if any, of dividends in arrears on shares with preferential dividend rights. Under the balance sheet test, the Company may also make a distribution if, immediately after the distribution, the value of its assets equals or exceeds the sum of (a) its total liabilities plus (b) the liquidation preference of any shares which have a preference upon dissolution over the rights of shareholders receiving the distribution. Indebtedness is not considered a liability if the terms of such indebtedness provide that payment of principal and interest thereon are to be made only if, and to the extent that, a distribution to shareholders could be made under the balance sheet test.

The Federal Reserve, the Federal Deposit Insurance Corporation (the “FDIC”) and the California Department of Financial Protection and Innovation (the “CDFPI”) periodically examine the Company’s business, including compliance with laws and regulations. If, as a result of an examination, a banking agency were to determine that the Company’s financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of the Company’s operations had become unsatisfactory, or that the Company was in violation of any law or regulation, they may take a number of different remedial actions as they deem appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in Company’s capital, to restrict growth, to assess civil money penalties, to fine or remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate the Company’s deposit insurance and place the Company into receivership or conservatorship.

Note 15 - Revenue Recognition

The following table presents revenue from contracts with customers within the scope of ASC 606, Revenue from Contracts with Customers, for the periods indicated:

Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands) 2022 2021 2022 2021
Noninterest income in-scope of Topic 606
Service charges and fees on deposits:
Monthly service fees $ 24 $ 21 $ 67 $ 60
Account analysis fees 243 220 690 649
Non-sufficient funds charges 53 35 157 130
Other deposit related fees 21 16 60 48
Total service charges and fees on deposits 341 292 974 887
Debit card fees 87 86 256 222
Gain (loss) on sale of other real estate owned 152 — 152 74
Wire transfer fees 159 159 484 435
Other service charges 48 50 140 150
Total $ 787 $ 587 $ 2,006 $ 1,768

Note 16 - Subsequent Events

Dividend Declared on Common Stock. On October 27, 2022, the Company’s Board of Directors declared a quarterly cash dividend of $0.15 per common share. The dividend will be paid on or about November 18, 2022, to shareholders of record as of the close of business on November 10, 2022.

The Company has evaluated the effects of events that have occurred subsequent to September 30, 2022 through the issuance date of these consolidated financial statements (unaudited). Other than the event described above, there have been no material events that would require disclosure in the consolidated financial statements or in the notes to the consolidated financial statements.

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is management’s discussion and analysis of the major factors that influenced the Company’s results of operations and financial condition as of and for the three and nine months ended September 30, 2022. This analysis should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 and with the unaudited consolidated financial statements and notes (unaudited) thereto set forth in this Quarterly Report on Form 10-Q.

Critical Accounting Estimates

The Company’s consolidated financial statements are prepared in accordance with GAAP and general practices within the banking industry. Within these financial statements, certain financial information contains approximate measurements of financial effects of transactions and impacts at the consolidated statements of financial condition dates and the Company’s results of operations for the reporting periods. As certain accounting policies require significant estimates and assumptions that have a material impact on the carrying value of assets and liabilities, the Company has established critical accounting policies to facilitate making the judgment necessary to prepare financial statements. The Company’s critical accounting policies are described in Note 1 to Consolidated Financial Statements and in the “Critical Accounting Estimates” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in its Annual Report on Form 10-K for the year ended December 31, 2021 and in Note 1 to Consolidated Financial Statements (unaudited) included in Part I of this Quarterly Report on Form 10-Q.

Non-GAAP Measures

The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. Generally, a non-GAAP financial measure is a numerical measure of a company’s financial performance, financial position or cash flows that exclude (or include) amounts that are included in (or excluded from) the most directly comparable measure calculated, and presented in accordance with GAAP. However, these non-GAAP financial measures are supplemental and are not a substitute for an analysis based on GAAP measures and may not be comparable to non-GAAP financial measures that may be presented by other companies.

The following tables present reconciliation of return on average tangible common equity, tangible common equity per common share and tangible common equity to tangible assets ratios to their most comparable GAAP measures as of the dates or for the periods indicated. These non-GAAP measures are used by management in its analysis of the Company's performance.

Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands) 2022 2021 2022 2021
Average total shareholders' equity $ 338,248 $ 243,185 $ 296,871 $ 239,833
Less: average preferred stock 69,141 — 28,453 —
Average tangible common equity $ 269,107 $ 243,185 $ 268,418 $ 239,833
Net income $ 6,953 $ 11,023 $ 26,285 $ 29,427
Annualized return on average shareholder's equity 8.16 % 17.98 % 11.84 % 16.40 %
Annualized return on average tangible common equity 10.25 % 17.98 % 13.09 % 16.40 % ($ in thousands, except per share data) September 30, 2022 December 31, 2021 September 30, 2021
--- --- --- --- --- --- --- --- --- ---
Total shareholders' equity $ 332,719 $ 256,286 $ 247,598
Less: preferred stock 69,141 — —
Tangible common equity $ 263,578 $ 256,286 $ 247,598
Outstanding common shares 14,853,140 14,865,825 14,841,626
Book value per common share $ 22.40 $ 17.24 $ 16.68
Tangible common equity per common share $ 17.75 $ 17.24 $ 16.68
Total assets $ 2,327,051 $ 2,149,735 $ 2,104,699
Total shareholders' equity to total assets 14.30 % 11.92 % 11.76 %
Tangible common equity to total assets 11.33 % 11.92 % 11.76 %

The following table presents reconciliation of allowance for loan losses to loans held-for-investment, excluding SBA PPP loans to its most comparable GAAP measure as of the dates indicated. The Company believes that this non-GAAP measure enhances comparability to prior periods in which there were no SBA PPP loans and provides supplemental information regarding the Company’s credit quality trend.

($ in thousands) September 30, 2022 December 31, 2021 September 30, 2021
Loans held-for-investment $ 1,959,237 $ 1,732,205 $ 1,707,878
Less: SBA PPP loans 1,309 65,329 101,901
Loans held-for-investment, excluding SBA PPP loans $ 1,957,928 $ 1,666,876 $ 1,605,977
Allowance for loan losses $ 23,761 $ 22,381 $ 23,807
Allowance for loan losses to loans held-for-investment 1.21 % 1.29 % 1.39 %
Allowance for loan losses to loans held-for-investment, excluding SBA PPP loans 1.21 % 1.34 % 1.48 %

Selected Financial Data

The following table presents certain selected financial data as of the dates or for the periods indicated:

As of or For the Three Months Ended September 30, As of or For the Nine Months Ended September 30,
($ in thousands, except per share data) 2022 2021 2022 2021
Selected balance sheet data:
Cash and cash equivalents $ 154,038 $ 214,973 $ 154,038 $ 214,973
Securities available-for-sale 129,401 133,102 129,401 133,102
Loans held-for-sale 18,982 29,020 18,982 29,020
Loans held-for-investment, net of deferred loan costs (fees) 1,959,237 1,707,878 1,959,237 1,707,878
Allowance for loan losses (23,761) (23,807) (23,761) (23,807)
Total assets 2,327,051 2,104,699 2,327,051 2,104,699
Total deposits 1,978,098 1,832,666 1,978,098 1,832,666
Shareholders’ equity 332,719 247,598 332,719 247,598
Selected income statement data:
Interest income $ 26,835 $ 21,168 $ 70,175 $ 60,477
Interest expense 2,812 941 4,808 3,435
Net interest income 24,023 20,227 65,367 57,042
Provision (reversal) for loan losses 3,753 (1,053) 2,453 (3,134)
Noninterest income 3,176 5,588 12,110 13,596
Noninterest expense 13,695 11,232 38,011 32,040
Income before income taxes 9,751 15,636 37,013 41,732
Income tax expense 2,798 4,613 10,728 12,305
Net income 6,953 11,023 26,285 29,427
Per share data:
Earnings per common share, basic $ 0.47 $ 0.74 $ 1.76 $ 1.94
Earnings per common share, diluted 0.46 0.73 1.73 1.92
Book value per common share (1) 22.40 16.68 22.40 16.68
Tangible common equity per common share (9) 17.75 16.68 17.75 16.68
Cash dividends declared per common share 0.15 0.12 0.45 0.32
Outstanding share data:
Number of common shares outstanding 14,853,140 14,841,626 14,853,140 14,841,626
Weighted-average common shares outstanding, basic 14,877,879 14,779,707 14,869,997 15,090,989
Weighted-average common shares outstanding, diluted 15,088,089 15,031,558 15,126,863 15,298,065
As of or For the Three Months Ended September 30, As of or For the Nine Months Ended September 30,
--- --- --- --- --- --- --- --- --- --- --- --- ---
($ in thousands, except per share data) 2022 2021 2022 2021
Selected performance ratios:
Return on average assets (2) 1.19 % 2.11 % 1.58 % 1.94 %
Return on average shareholders' equity (2) 8.16 % 17.98 % 11.84 % 16.40 %
Return on average tangible common equity (2),(9) 10.25 % 17.98 % 13.09 % 16.40 %
Dividend payout ratio (3) 31.91 % 16.22 % 25.57 % 16.49 %
Efficiency ratio (4) 50.35 % 43.51 % 49.06 % 45.36 %
Yield on average interest-earning assets (2) 4.75 % 4.12 % 4.35 % 4.05 %
Cost of average interest-bearing liabilities (2) 0.98 % 0.37 % 0.60 % 0.43 %
Net interest spread (2) 3.77 % 3.75 % 3.75 % 3.62 %
Net interest margin (2), (5) 4.25 % 3.93 % 4.05 % 3.82 %
Total loans to total deposits ratio (6) 100.01 % 94.77 % 100.01 % 94.77 %
Asset quality:
Loans 30 to 89 days past due and still accruing $ 410 $ 292 $ 410 $ 292
Nonperforming loans (7) 7,396 1,116 7,396 1,116
Nonperforming assets (8) 7,396 1,116 7,396 1,116
Net charge-offs (recoveries) 1,063 29 1,073 (431)
Loans 30 to 89 days past due and still accruing to loans held-for-investment 0.02 % 0.02 % 0.02 % 0.02 %
Nonperforming loans to loans held-for-investment 0.38 % 0.07 % 0.38 % 0.07 %
Nonperforming loans to allowance for loan losses 31.13 % 4.69 % 31.13 % 4.69 %
Nonperforming assets to total assets 0.32 % 0.05 % 0.32 % 0.05 %
Allowance for loan losses to loans held-for-investment 1.21 % 1.39 % 1.21 % 1.39 %
Allowance for loan losses to loans held-for-investment, excluding SBA PPP loans (9) 1.21 % 1.48 % 1.21 % 1.48 %
Allowance for loan losses to nonperforming loans 321.27 % 2,133.24 % 321.27 % 2,133.24 %
Net charge-offs (recoveries) to average loans held-for-investment (2) 0.23 % 0.01 % 0.08 % (0.03) %
Capital ratios:
Shareholders’ equity to total assets 14.30 % 11.76 % 14.30 % 11.76 %
Tangible common equity to total assets (9) 11.33 % 11.76 % 11.33 % 11.76 %
Average shareholders’ equity to average total assets 14.58 % 11.75 % 13.31 % 11.84 %
PCB Bancorp
Common tier 1 capital (to risk-weighted assets) 13.69 % 15.07 % 13.69 % 15.07 %
Total capital (to risk-weighted assets) 18.34 % 16.32 % 18.34 % 16.32 %
Tier 1 capital (to risk-weighted assets) 17.14 % 15.07 % 17.14 % 15.07 %
Tier 1 capital (to average assets) 14.74 % 11.91 % 14.74 % 11.91 %
PCB Bank
Common tier 1 capital (to risk-weighted assets) 16.82 % 14.76 % 16.82 % 14.76 %
Total capital (to risk-weighted assets) 18.02 % 16.01 % 18.02 % 16.01 %
Tier 1 capital (to risk-weighted assets) 16.82 % 14.76 % 16.82 % 14.76 %
Tier 1 capital (to average assets) 14.47 % 11.66 % 14.47 % 11.66 %

(1)    Shareholders’ equity divided by common shares outstanding.

(2)    Annualized.

(3)    Dividends declared per common share divided by basic earnings per common share.

(4)    Noninterest expenses divided by the sum of net interest income and noninterest income.

(5)    Net interest income divided by average total interest-earning assets.

(6)    Total loans include both loans held-for-sale and loans held-for-investment, net of unearned loan costs (fees).

(7)    Nonperforming loans include nonaccrual loans and loans past due 90 days or more and still accruing.

(8)    Nonperforming assets include nonperforming loans and other real estate owned.

(9)    Non-GAAP measure. See "Non-GAAP Measures" for a reconciliation to its most comparable GAAP measure.

Executive Summary

Q3 2022 Financial Highlights

•Net income was $7.0 million for the three months ended September 30, 2022, a decrease of $4.1 million, or 36.9%, from $11.0 million for the three months ended September 30, 2021;

◦The Company recorded a provision (reversal) for loan losses of $3.8 million for the three months ended September 30, 2022 compared with $(1.1) million for the three months ended September 30, 2021.

◦Net interest income was $24.0 million for the three months ended September 30, 2022 compared with $20.2 million for the three months ended September 30, 2021. Net interest margin was 4.25% for the three months ended September 30, 2022 compared with 3.93% for the three months ended September 30, 2021.

◦Gain on sale of loans was $1.4 million for the three months ended September 30, 2022 compared with $4.3 million for the three months ended September 30, 2021.

•Total assets were $2.33 billion at September 30, 2022, an increase of $177.3 million, or 8.2%, from $2.15 billion at December 31, 2021;

•Loans held-for-investment, net of deferred costs (fees), were $1.96 billion at September 30, 2022, an increase of $227.0 million, or 13.1%, from $1.73 billion at December 31, 2021;

◦Allowance for loan losses to total loans held-for-investment ratio was 1.21% at September 30, 2022 compared with 1.29% at December 31, 2021.

•Total deposits were $1.98 billion at September 30, 2022, an increase of $111.0 million, or 5.9%, from $1.87 billion at December 31, 2021;

•Announced a repurchase program on July 28, 2022 for the repurchase up to 5% of outstanding common stock. As of September 30, 2022, the Company repurchased and retired 119,941 shares of common stock for an aggregate cost of $2.2 million; and

•The Bank changed its name from Pacific City Bank to PCB Bank and opened 2 new full-service branches in Dallas, Texas and Palisades Park, New Jersey.

Results of Operations

Net Interest Income

A principal component of the Company’s earnings is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid on deposits and borrowed funds. Net interest income expressed as a percentage of average interest earning assets is referred to as the net interest margin. The net interest spread is the yield on average interest earning assets less the cost of average interest bearing liabilities. Net interest income is affected by changes in the balances of interest earning assets and interest bearing liabilities and changes in the yields earned on interest earning assets and the rates paid on interest bearing liabilities.

The following tables present interest income, average interest-earning assets, interest expense, average interest-bearing liabilities, and their corresponding yields and costs expressed both in dollars and rates, on a consolidated operations basis, for the periods indicated:

Three Months Ended September 30,
2022 2021
($ in thousands) Average Balance Interest Yield/ Cost (6) Average Balance Interest Yield/ Cost (6)
Interest-earning assets:
Total loans (1) $ 1,905,366 $ 24,835 5.17 % $ 1,715,106 $ 20,537 4.75 %
Mortgage backed securities 93,546 518 2.20 % 95,908 278 1.15 %
Collateralized mortgage obligation 24,090 151 2.49 % 22,534 57 1.00 %
SBA loan pool securities 10,435 56 2.13 % 10,390 45 1.72 %
Municipal bonds - tax exempt (2) 4,491 34 3.00 % 5,759 36 2.48 %
Corporate bonds 4,801 47 3.88 % 2,283 21 3.65 %
Interest-bearing deposits in other financial institutions 190,184 1,049 2.19 % 179,560 69 0.15 %
FHLB and other bank stock 10,183 145 5.65 % 8,577 125 5.78 %
Total interest-earning assets 2,243,096 26,835 4.75 % 2,040,117 21,168 4.12 %
Noninterest-earning assets:
Cash and due from banks 20,609 19,915
Allowance for loan losses (21,117) (24,854)
Other assets 76,851 35,187
Total noninterest earning assets 76,343 30,248
Total assets $ 2,319,439 $ 2,070,365
Interest-bearing liabilities:
Deposits:
NOW and money market accounts $ 577,975 1,375 0.94 % $ 387,661 291 0.30 %
Savings 14,990 2 0.05 % 12,806 2 0.06 %
Time deposits 544,774 1,421 1.03 % 599,865 592 0.39 %
Borrowings 2,033 14 2.73 % 18,152 56 1.22 %
Total interest-bearing liabilities 1,139,772 2,812 0.98 % 1,018,484 941 0.37 %
Noninterest-bearing liabilities:
Demand deposits 825,362 794,165
Other liabilities 16,057 14,531
Total noninterest-bearing liabilities 841,419 808,696
Total liabilities 1,981,191 1,827,180
Shareholders’ equity 338,248 243,185
Total liabilities and shareholders’ equity $ 2,319,439 $ 2,070,365
Net interest income $ 24,023 $ 20,227
Net interest spread (3) 3.77 % 3.75 %
Net interest margin (4) 4.25 % 3.93 %
Cost of funds (5) 0.57 % 0.21 %

(1)    Average balance includes both loans held-for-sale and loans held-for-investment, as well as nonaccrual loans. Net amortization of deferred loan fees (cost) of $243 thousand and $2.0 million, respectively, and net accretion of discount on loans of $867 thousand and $932 thousand, respectively, are included in the interest income for the three months ended September 30, 2022 and 2021.

(2)    The yield on municipal bonds has not been computed on a tax-equivalent basis.

(3)    Net interest spread is calculated by subtracting average rate on interest-bearing liabilities from average yield on interest-earning assets.

(4)    Net interest margin is calculated by dividing net interest income by average interest-earning assets.

(5)    Cost of funds is calculated by dividing annualized interest expense on total interest-bearing liabilities by the sum of average total interest-bearing liabilities and noninterest-bearing demand deposits.

(6)    Annualized.

Nine Months Ended September 30,
2022 2021
($ in thousands) Average Balance Interest Yield/ Cost (6) Average Balance Interest Yield/ Cost (6)
Interest-earning assets:
Total loans (1) $ 1,828,187 $ 66,268 4.85 % $ 1,683,084 $ 58,792 4.67 %
Mortgage backed securities 88,634 1,241 1.87 % 90,095 726 1.08 %
Collateralized mortgage obligation 22,775 324 1.90 % 23,442 168 0.96 %
SBA loan pool securities 10,566 137 1.73 % 10,959 148 1.81 %
Municipal bonds - tax exempt (2) 5,152 107 2.78 % 5,774 109 2.52 %
Corporate bonds 4,896 141 3.85 % 769 21 4.00 %
Interest-bearing deposits in other financial institutions 188,770 1,555 1.10 % 172,136 156 0.12 %
FHLB and other bank stock 9,541 402 5.63 % 8,527 357 5.60 %
Total interest-earning assets 2,158,521 70,175 4.35 % 1,994,786 60,477 4.05 %
Noninterest-earning assets:
Cash and due from banks 20,599 19,359
Allowance for loan losses (21,561) (25,753)
Other assets 72,563 37,371
Total noninterest earning assets 71,601 30,977
Total assets $ 2,230,122 $ 2,025,763
Interest-bearing liabilities:
Deposits:
NOW and money market accounts $ 492,130 2,118 0.58 % $ 398,459 941 0.32 %
Savings 15,205 6 0.05 % 11,676 4 0.05 %
Time deposits 550,770 2,565 0.62 % 616,707 2,251 0.49 %
Borrowings 7,824 119 2.03 % 37,363 239 0.86 %
Total interest-bearing liabilities 1,065,929 4,808 0.60 % 1,064,205 3,435 0.43 %
Noninterest-bearing liabilities:
Demand deposits 851,837 707,800
Other liabilities 15,485 13,925
Total noninterest-bearing liabilities 867,322 721,725
Total liabilities 1,933,251 1,785,930
Shareholders’ equity 296,871 239,833
Total liabilities and shareholders’ equity $ 2,230,122 $ 2,025,763
Net interest income $ 65,367 $ 57,042
Net interest spread (3) 3.75 % 3.62 %
Net interest margin (4) 4.05 % 3.82 %
Cost of funds (5) 0.34 % 0.26 %

(1)    Average balance includes both loans held-for-sale and loans held-for-investment, as well as nonaccrual loans. Net amortization of deferred loan fees (cost) of $2.0 million and $4.7 million, respectively, and net accretion of discount on loans of $2.7 million and $2.7 million, respectively, are included in the interest income for the nine months ended September 30, 2022 and 2021.

(2)    The yield on municipal bonds has not been computed on a tax-equivalent basis.

(3)    Net interest spread is calculated by subtracting average rate on interest-bearing liabilities from average yield on interest-earning assets.

(4)    Net interest margin is calculated by dividing net interest income by average interest-earning assets.

(5)    Cost of funds is calculated by dividing annualized interest expense on total interest-bearing liabilities by the sum of average total interest-bearing liabilities and noninterest-bearing demand deposits.

(6)    Annualized.

The following table presents the changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. Information is provided on changes attributable to: (i) changes in volume multiplied by the prior rate; and (ii) changes in rate multiplied by the prior volume. Changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.

Three Months Ended September 30, Nine Months Ended September 30,
2022 vs. 2021 2022 vs. 2021
Increase (Decrease) Due to Net Increase (Decrease) Increase (Decrease) Due to Net Increase (Decrease)
($ in thousands) Volume Rate Volume Rate
Interest earned on:
Total loans $ 2,278 $ 2,020 $ 4,298 $ 5,069 $ 2,407 $ 7,476
Investment securities 2 367 369 9 769 778
Other interest-earning assets 13 987 1,000 50 1,394 1,444
Total interest income 2,293 3,374 5,667 5,128 4,570 9,698
Interest incurred on:
Savings, NOW, and money market deposits 141 943 1,084 224 955 1,179
Time deposits (54) 883 829 (241) 555 314
Borrowings (50) 8 (42) (189) 69 (120)
Total interest expense 37 1,834 1,871 (206) 1,579 1,373
Change in net interest income $ 2,256 $ 1,540 $ 3,796 $ 5,334 $ 2,991 $ 8,325

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

The following table presents the components of net interest income for the periods indicated:

Three Months Ended September 30, Amount Change Percentage Change
($ in thousands) 2022 2021
Interest and dividend income:
Loans, including fees $ 24,835 $ 20,537 $ 4,298 20.9 %
Investment securities 806 437 369 84.4 %
Other interest-earning assets 1,194 194 1,000 515.5 %
Total interest income 26,835 21,168 5,667 26.8 %
Interest expense:
Deposits 2,798 885 1,913 216.2 %
Borrowings 14 56 (42) (75.0) %
Total interest expense 2,812 941 1,871 198.8 %
Net interest income $ 24,023 $ 20,227 $ 3,796 18.8 %

Net interest income increased primarily due to a 9.9% increase in average balance of interest-earning assets and a 63 basis point increase in average yield, partially offset by an 11.9% increase in average balance of interest-bearing liabilities and a 61 basis point increase in average cost.

Interest and fees on loans increased primarily due to an 11.1% increase in average balance and a 42 basis point increase in average yield. The increase in average yield was primarily due to an increase in overall interest rates on loans from the rising interest rate environment, partially offset by decreases in net amortization of deferred loan fees and net accretion of discount on loans. The decrease in net amortization of deferred loan fees was primarily due to the decreased amount of SBA PPP loan payoffs.

Interest on investment securities increased primarily due to a 106 basis point increase in average yield and a 0.4% increase in average balance. The increase in average yield was primarily due to a decrease in net amortization of premiums on mortgage-backed securities and collateralized mortgage obligations, as well as a higher yield on newly purchased investment securities. For the three months ended September 30, 2022 and 2021, yield on total investment securities was 2.33% and 1.27%, respectively.

Interest income on other interest-earning assets increased primarily due to a 195 basis point increase in average yield and a 6.5% increase in average balance. The increase in average yield was primarily due to an increase in interest rate on cash held at the Federal Reserve Bank (“FRB”) account. The increase in average balance was primarily due to an increase in deposits and the ECIP capital investment, partially offset by an increase in loans. The Company maintains most of its cash at the FRB account. For the three months ended September 30, 2022 and 2021, yield on total other interest-earning assets was 2.36% and 0.41%, respectively.

Interest expense on deposits increased primarily due to a 63 basis point increase in average cost of interest-bearing deposits and a 48.1% increase in savings, NOW and money market accounts, partially offset by a 9.2% decrease in average balance of time deposits. The increase in average cost was primarily due to an increase in market rates. The decrease in average balance of time deposits was primarily due to a lower level of new time deposits. For the three months ended September 30, 2022 and 2021, average cost on total interest-bearing deposits was 0.98% and 0.35%, respectively, and average cost on total deposits were 0.57% and 0.20%, respectively.

Interest expense on borrowings decreased primarily due to a decrease in average balance, partially offset by an increase in average cost. The Company had no outstanding borrowings as of September 30, 2022.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

The following table presents the components of net interest income for the periods indicated:

Nine Months Ended September 30, Amount Change Percentage Change
($ in thousands) 2022 2021
Interest and dividend income:
Loans, including fees $ 66,268 $ 58,792 $ 7,476 12.7 %
Investment securities 1,950 1,172 778 66.4 %
Other interest-earning assets 1,957 513 1,444 281.5 %
Total interest income 70,175 60,477 9,698 16.0 %
Interest expense:
Deposits 4,689 3,196 1,493 46.7 %
Borrowings 119 239 (120) (50.2) %
Total interest expense 4,808 3,435 1,373 40.0 %
Net interest income $ 65,367 $ 57,042 $ 8,325 14.6 %

Net interest income increased primarily due to an 8.2% increase in average balance of interest-earning assets, a 30 basis point increase in average yield, and a 17 basis point decrease in average cost, partially offset by a 0.2% increase in average balance of interest-bearing liabilities.

Interest and fees on loans increased primarily due to an 8.6% increase in average balance and an 18 basis point increase in average yield. The increase in average yield was primarily due to the rising interest rate environment, partially offset by a decrease in net amortization of deferred loan fees. The decrease in net amortization of deferred loan fees was primarily due to the decreased amount of SBA PPP loan payoffs.

Interest on investment securities increased primarily due to a 77 basis point increase in average yield and a 0.8% increase in average balance. The increase in average yield was primarily due to a decrease in net amortization of premiums on mortgage-backed securities and collateralized mortgage obligations. For the nine months ended September 30, 2022 and 2021, yield on total investment securities was 1.97% and 1.20%, respectively.

Interest income on other interest-earning assets increased primarily due to a 94 basis point increase in average yield and a 9.8% increase in average balance. The increase in average yield was primarily due to an increase in interest rate on cash held at the FRB account. The increase in average balance was primarily due to an increase in deposits and the ECIP capital investment, partially offset by an increase in loans. For the nine months ended September 30, 2022 and 2021, yield on total other interest-earning assets was 1.32% and 0.38%, respectively.

Interest expense on deposits decreased primarily due to a 17 basis point decrease in average cost of interest-bearing deposits and a 10.7% decrease in average balance of time deposits, partially offset by a 23.7% increase in savings, NOW and money market accounts. The increase in average cost was primarily due to an increase in market rates. The decrease in average balance of time deposits was primarily due to a lower level of new time deposits. For the nine months ended September 30, 2022 and 2021, average cost on total interest-bearing deposits was 0.59% and 0.42%, respectively, and average cost on total deposits were 0.33% and 0.25%, respectively.

Interest expense on borrowings decreased primarily due to a decrease in average balance, partially offset by an increase in average cost of FHLB advances. The Company had no outstanding borrowings as of September 30, 2022.

Provision (reversal) for Loan Losses

Provision (reversal) for loan losses was $3.8 million and $(1.1) million for the three months ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022 and 2021, provision (reversal) for loan losses was $2.5 million and $(3.1) million, respectively. The increase in provision for loan losses was primarily due to increases in gross loan balance, and qualitative adjustment factors related to current economic condition and increased charge-offs during the current quarter.

See further discussion in “Allowance for Loan Losses.”

Noninterest Income

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

The following table presents the components of noninterest income for the periods indicated:

Three Months Ended September 30, Amount Change Percentage Change
($ in thousands) 2022 2021
Service charges and fees on deposits $ 341 $ 292 $ 49 16.8 %
Loan servicing income 780 655 125 19.1 %
Bank-owned life insurance income 178 — 178 NM
Gain on sale of loans 1,415 4,269 (2,854) (66.9) %
Other income 462 372 90 24.2 %
Total noninterest income $ 3,176 $ 5,588 $ (2,412) (43.2) %

Loan servicing income increased primarily due to an increase in servicing income received and a decrease in servicing asset amortization. Servicing asset amortization was $522 thousand and $525 thousand, respectively, for the three months ended September 30, 2022 and 2021.

The Company purchased bank-owned life insurance during November 2021. Bank-owned life insurance income represents the increase in cash surrender value of the insurance policy.

Gain on sale of loans decreased primarily due to a lower level of premium on SBA loans in the secondary market and a decrease in sales volume. The Company sold SBA loans of $27.3 million with a gain of $1.4 million and residential property loans of $400 thousand with a gain of $8 thousand during the three months ended September 30, 2022. During the three months ended September 30, 2021, the Company sold SBA loans of $45.0 million with a gain of $4.3 million, residential property loans of $301 thousand with a gain of $2 thousand, and certain commercial property loans of $3.5 million with a gain of $4 thousand.

Other income primarily included wire transfer fees of $159 thousand and $159 thousand, respectively, and debit card interchange fees of $87 thousand and $86 thousand, respectively, for the three months ended September 30, 2022 and 2021.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

The following table presents the components of noninterest income for the periods indicated:

Nine Months Ended September 30, Amount Change Percentage Change
($ in thousands) 2022 2021
Service charges and fees on deposits $ 974 $ 887 $ 87 9.8 %
Loan servicing income 2,235 2,082 153 7.3 %
Bank-owned life insurance income 525 — 525 NM
Gain on sale of loans 7,231 9,558 (2,327) (24.3) %
Other income 1,145 1,069 76 7.1 %
Total noninterest income $ 12,110 $ 13,596 $ (1,486) (10.9) %

Loan servicing income increased primarily due to an increase in servicing income received, partially offset by an increase in servicing asset amortization. Servicing asset amortization was $1.6 million and $1.5 million, respectively, for the nine months ended September 30, 2022 and 2021.

The Company purchased bank-owned life insurance during November 2021. Bank-owned life insurance income represents the increase in cash surrender value of the insurance policy.

Gain on sale of loans decreased primarily due to a lower level of premium on SBA loans in the secondary market. The Company sold SBA loans of $105.4 million with a gain of $7.2 million and residential property loans of $400 thousand with a gain of $8 thousand during the nine months ended September 30, 2022. During the nine months ended September 30, 2021, the Company sold SBA loans of $90.1 million with a gain of $9.4 million and residential property loans of $9.8 million with a gain of $142 thousand, and certain commercial property loans of $5.2 million with a gain of $4 thousand.

Other income primarily included wire transfer fees of $484 thousand and $435 thousand, respectively, debit card interchange fees of $256 thousand and $222 thousand, respectively, and gain on sale of OREO of $152 thousand and $74 thousand, respectively, for the nine months ended September 30, 2022 and 2021.

Noninterest Expense

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

The following table presents the components of noninterest expense for the periods indicated:

Three Months Ended September 30, Amount Change Percentage Change
($ in thousands) 2022 2021
Salaries and employee benefits $ 8,457 $ 7,606 $ 851 11.2 %
Occupancy and equipment 1,650 1,399 251 17.9 %
Professional fees 587 422 165 39.1 %
Marketing and business promotion 909 416 493 118.5 %
Data processing 427 391 36 9.2 %
Director fees and expenses 179 144 35 24.3 %
Regulatory assessments 150 12 138 1,150.0 %
Other expenses 1,336 842 494 58.7 %
Total noninterest expense $ 13,695 $ 11,232 $ 2,463 21.9 %

Salaries and employee benefits increased primarily due to an increase in salaries and related employee benefit expenses from the increased number of employees, partially offset by a decrease in incentives tied to the sales of Loan Production Offices (“LPO”) originated SBA loans and an increase in loan origination cost, which offsets the recognition of salaries. The number of full-time equivalent employees was 273 at September 30, 2022 compared to 249 at September 30, 2021.

Occupancy and equipment increased primarily due to new branch openings.

Marketing and business promotion expense increased primarily due to increases in marketing activities and advertisement for the Bank's name change to PCB Bank, and new branch openings.

Director fees and expenses increased primarily due to a new director appointed during the fourth quarter of 2021.

Regulatory assessment expense increased primarily due to an adjustment was made for the assessment rate decrease during the three months ended September 30, 2021.

Other expenses primarily included $174 thousand and $42 thousand in loan related expenses, $544 thousand and $378 thousand in office expense, and $171 thousand and $144 thousand in armed guard expense for the three months ended September 30, 2022 and 2021, respectively. The increase in office expense was primarily due to new branch openings.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

The following table presents the components of noninterest expense for the periods indicated:

Nine Months Ended September 30, Amount Change Percentage Change
($ in thousands) 2022 2021
Salaries and employee benefits $ 25,177 $ 20,913 $ 4,264 20.4 %
Occupancy and equipment 4,584 4,158 426 10.2 %
Professional fees 1,632 1,574 58 3.7 %
Marketing and business promotion 1,426 1,070 356 33.3 %
Data processing 1,272 1,164 108 9.3 %
Director fees and expenses 530 433 97 22.4 %
Regulatory assessments 438 399 39 9.8 %
Other expenses 2,952 2,329 623 26.7 %
Total noninterest expense $ 38,011 $ 32,040 $ 5,971 18.6 %

Salaries and employee benefits increased primarily due to increases in salaries and related employee benefit expenses from the increased number of employees, and the incentives tied to sales of LPO originated SBA loans, and a decrease in loan origination cost. For the nine months ended September 30, 2021, loan origination cost was

higher primarily due to the SBA PPP loan production. The number of full-time equivalent employees was 273 at September 30, 2022 compared to 249 at September 30, 2021.

Occupancy and equipment increased primarily due to new branch openings.

Marketing and business promotion expense increased primarily due to increases in marketing activities and advertisement for the Bank's name change and new branch openings.

Director fees and expenses increased primarily due to a new director appointed during the fourth quarter of 2021.

Regulatory assessment expense increased primarily due to an increase in balance sheet, partially offset by a decrease in assessment rate.

Other expenses primarily included $275 thousand and $263 thousand in loan related expenses, $1.2 million and $1.0 million in office expense, and $461 thousand and $388 thousand in armed guard expense for the nine months ended September 30, 2022 and 2021, respectively.

Income Tax Expense

Income tax expense was $2.8 million and $4.6 million, respectively, and the effective tax rate was 28.7% and 29.5%, respectively, for the three months ended September 30, 2022 and 2021. For the nine months ended September 30, 2022 and 2021, income tax expense was $10.7 million and $12.3 million, respectively, and the effective tax rate was 29.0% and 29.5%, respectively.

Financial Condition

Investment Securities

The Company’s investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit risk. The types and maturities of securities purchased are primarily based on current and projected liquidity and interest rate sensitivity positions.

The following table presents the amortized cost and fair value of the investment securities portfolio as of the dates indicated:

September 30, 2022 December 31, 2021
($ in thousands) Amortized Cost Fair Value Unrealized Gain (Loss) Amortized Cost Fair Value Unrealized Gain (Loss)
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities $ 101,233 $ 88,302 $ (12,931) $ 85,346 $ 84,713 $ (633)
Residential collateralized mortgage obligations 24,486 22,701 (1,785) 18,990 19,056 66
SBA loan pool securities 10,244 9,816 (428) 8,520 8,672 152
Municipal bonds 4,264 4,020 (244) 5,329 5,686 357
Corporate bonds 5,000 4,562 (438) 5,000 5,071 71
Total securities available-for-sale $ 145,227 $ 129,401 $ (15,826) $ 123,185 $ 123,198 $ 13

Total investment securities were $129.4 million at September 30, 2022, an increase of $6.2 million, or 5.0%, from $123.2 million at December 31, 2021. The increase was primarily due to purchases of $41.1 million, partially offset by principal paydowns of $18.8 million, a decrease in fair value of securities available-for-sale of $15.8 million, and net premium amortization of $307 thousand.

The Company performs an OTTI assessment at least on a quarterly basis. OTTI is recognized when fair value is below the amortized cost where: (i) an entity has the intent to sell the security; (ii) it is more likely than not that an entity will be required to sell the security before recovery of its amortized cost basis; or (iii) an entity does not expect to recover the entire amortized cost basis of the security. All individual securities in a continuous unrealized loss position for 12 months or more as of September 30, 2022 and December 31, 2021 had an investment grade rating upon purchase. The issuers of these securities have not established any cause for default on these securities and various rating agencies have reaffirmed their long-term investment grade status as of September 30, 2022 and December 31, 2021. These securities have fluctuated in value since their purchase dates as market interest rates fluctuated. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell before the recovery of its amortized cost basis. The Company determined that the investment securities with unrealized losses for twelve months or more are not other-than-temporary impaired, and, therefore, no impairment was recognized during the three and nine months ended September 30, 2022 and 2021.

The following table presents the contractual maturity schedule for securities, at amortized cost, and their weighted-average yields as of the date indicated:

September 30, 2022
Within One Year More than One Year through Five Years More than Five Years through Ten Years More than Ten Years Total
($ in thousands) Amortized Cost Weighted-Average Yield Amortized Cost Weighted-Average Yield Amortized Cost Weighted-Average Yield Amortized Cost Weighted-Average Yield Amortized Cost Weighted-Average Yield
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities $ 56 1.11 % $ 1,554 1.67 % $ 9,156 1.93 % $ 90,467 2.13 % $ 101,233 2.10 %
Residential collateralized mortgage obligations — — % 377 1.81 % 7,988 3.34 % 16,121 2.46 % 24,486 2.73 %
SBA loan pool securities — — % 235 2.58 % 3,515 1.99 % 6,494 2.13 % 10,244 2.09 %
Municipal bonds 963 2.13 % 871 3.26 % 81 2.99 % 2,349 3.53 % 4,264 3.15 %
Corporate bonds — — % — — % 5,000 3.75 % — — % 5,000 3.75 %
Total securities available-for-sale $ 1,019 2.08 % $ 3,037 2.21 % $ 25,740 2.73 % $ 115,431 2.20 % $ 145,227 2.29 %

Weighted-average yields are based upon the amortized cost of securities and are calculated using the interest method which takes into consideration of premium amortization and discount accretion. Weighted-average yields on tax-exempt debt securities exclude the federal income tax benefit.

Loans Held-For-Sale

Loans held-for-sale are carried at the lower of cost or fair value. When a determination is made at the time of commitment to originate as held-for-investment, it is the Company’s intent to hold these loans to maturity or for the foreseeable future, subject to periodic reviews under the Company’s management evaluation processes, including asset/liability management and credit risk management. When the Company subsequently changes its intent to hold certain loans, the loans are transferred to held-for-sale at the lower of cost or fair value. Certain loans are transferred to held-for-sale with write-downs to allowance for loan losses. The following table presents a composition of loans held-for-sale as of the dates indicated:

($ in thousands) September 30, 2022 December 31, 2021
Real estate loans:
SBA property $ 15,981 $ 33,603
Commercial and industrial loans:
SBA commercial term 3,001 3,423
Total $ 18,982 $ 37,026

Loans held-for-sale were $19.0 million at September 30, 2022, a decrease of $18.0 million, or 48.7%, from $37.0 million at December 31, 2021. The decrease was primarily due to sales of $105.8 million, partially offset by new funding of $88.2 million.

Loans Held-For-Investment and Allowance for Loan Losses

The following table presents the composition of the Company’s loans held-for-investment as of the dates indicated:

September 30, 2022 December 31, 2021
($ in thousands) Amount Percentage to Total Amount Percentage to Total
Real estate loans:
Commercial property $ 1,271,781 65.0 % $ 1,105,843 63.9 %
Residential property 297,506 15.2 % 209,485 12.1 %
SBA property 136,088 6.9 % 129,661 7.5 %
Construction 14,592 0.7 % 8,252 0.5 %
Total real estate loans 1,719,967 87.8 % 1,453,241 84.0 %
Commercial and industrial loans:
Commercial term 80,225 4.1 % 73,438 4.2 %
Commercial lines of credit 117,960 6.0 % 100,936 5.8 %
SBA commercial term 16,542 0.8 % 17,640 1.0 %
SBA PPP 1,309 0.1 % 65,329 3.8 %
Total commercial and industrial loans 216,036 11.0 % 257,343 14.8 %
Other consumer loans 23,234 1.2 % 21,621 1.2 %
Loans held-for-investment 1,959,237 100.0 % 1,732,205 100.0 %
Allowance for loan losses (23,761) (22,381)
Net loans held-for-investment $ 1,935,476 $ 1,709,824
Allowance for loan losses to loans held-for-investment 1.21 % 1.29 %
Allowance for loan losses to loans held-for-investment, excluding SBA PPP loans (1) 1.21 % 1.34 %

(1)    Non-GAAP measure. See "Non-GAAP Measures" for a reconciliation to its most comparable GAAP measure.

Loans held-for-investment, net of deferred loan costs (fees) were $1.96 billion at September 30, 2022, an increase of $227.0 million, or 13.1%, from $1.73 billion at December 31, 2021. The increase was primarily due to new funding of $450.8 million and advances of $111.3 million, partially offset by paydowns and payoffs of $333.9 million. During the nine months ended September 30, 2022, SBA PPP loans of $64.0 million were paid off and related unamortized net deferred fees were recognized through interest income. Commercial and residential property loan production contributed significantly to the Company’s loan growth for the nine months ended September 30, 2022.

SBA Paycheck Protection Program

The following table presents a summary of SBA PPP loans as of the dates indicated:

September 30, 2022 December 31, 2021
($ in thousands) Number of Loans Carrying Value Contractual Balance Number of Loans Carrying Value Contractual Balance
Loan amount:
$50,000 or less 3 $ 94 $ 99 145 $ 2,915 $ 3,074
Over $50,000 and less than $350,000 7 804 850 156 25,417 26,146
Over $350,000 and less than $2,000,000 1 411 421 52 33,812 34,432
$2,000,000 or more — — — 1 3,185 3,187
Total 11 $ 1,309 $ 1,370 354 $ 65,329 $ 66,839

Loan Modifications Related to the COVID-19 Pandemic

The Company had provided modifications related to the COVID-19 pandemic during the years ended December 31, 2021 and 2020. The Company had no outstanding modification since September 30, 2021.

The following table presents the risk categories and accrued interest receivable for loans previously modified in response to the COVID-19 pandemic, but that have reverted back to previous contractual payment terms as of the dates indicated:

Carrying Value Per Risk Category Accrued Interest Receivable
($ in thousands) Pass Special Mention Substandard Doubtful Total
September 30, 2022
Real estate loans:
Commercial property $ 228,850 $ 2,782 $ 368 $ — $ 232,000 $ 637
Residential property 19,341 — 372 — 19,713 471
SBA property 3,631 248 — — 3,879 15
Commercial and industrial loans:
Commercial term 18,504 860 1,015 — 20,379 64
SBA commercial term 1,351 — 41 — 1,392 4
Other consumer loans 431 — — — 431 2
Total $ 272,108 $ 3,890 $ 1,796 $ — $ 277,794 $ 1,193
December 31, 2021
Real estate loans:
Commercial property $ 291,759 $ 11,739 $ 1,525 $ — $ 305,023 $ 730
Residential property 25,620 — — — 25,620 537
SBA property 3,683 251 — — 3,934 15
Commercial and industrial loans:
Commercial term 29,744 3,563 1,114 — 34,421 84
SBA commercial term 1,663 — 57 — 1,720 6
Other consumer loans 699 — — — 699 2
Total $ 353,168 $ 15,553 $ 2,696 $ — $ 371,417 $ 1,374

The decrease in special mention loans for the nine months ended September 30, 2022 was primarily due to improvements of 2 loans with an aggregated carrying value of $11.3 million at December 31, 2021.

Allowance for loan losses

The Company’s methodology for assessing the appropriateness of the allowance for loan losses includes a general allowance for performing loans, which are grouped based on similar characteristics, and a specific allowance for individual impaired loans or loans considered by management to be in a high-risk category. General allowances are established based on a number of factors, including historical loss rates, an assessment of portfolio trends and conditions, accrual status and economic conditions.

For any loan held-for-investment, a specific allowance may be assigned based on an impairment analysis. Loans are considered impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The amount of impairment is based on an analysis of the most probable source of repayment, including the present value of the loan’s expected future cash flows, the estimated market value or the fair value of the underlying collateral. Interest income on impaired loans is accrued as earned, unless the loan is placed on nonaccrual status.

Individual loans considered to be uncollectible are charged off against the allowance for loan losses. Factors used in determining the amount and timing of charge-offs on loans include consideration of the loan type, length of delinquency, sufficiency of collateral value, lien priority and the overall financial condition of the borrower. Collateral value is determined using updated appraisals and/or other market comparable information. Charge-offs are generally taken on loans once the impairment is confirmed. Recoveries on loans previously charged off are added to the allowance for loan losses.

The decrease in allowance for loan losses to loans held-for-investment was primarily due to a decrease in historical loss and qualitative adjustment factor allocations as a result of improving economic conditions, partially offset by an increase in commercial property loans.

The Company analyzes the loan portfolio, including delinquencies, concentrations, and risk characteristics, at least quarterly in order to assess the overall level of the allowance for loan losses. The Company also relies on internal and external loan review procedures to further assess individual loans and loan pools, and economic data for overall industry and geographic trends.

In determining the allowance and the related provision for loan losses, the Company considers three principal elements: (i) valuation allowances based upon probable incurred losses identified during the review of impaired commercial and industrial, commercial property and construction loans, (ii) allocations, by loan classes, on loan portfolios based on historical loan loss experience and (iii) qualitative factors. Provisions for loan losses are charged to operations to record changes to the allowance for loan losses to a level deemed appropriate.

The SBA guarantee on PPP loans cannot be separated from the loan and therefore is not a separate unit of account. The Company considered the SBA guarantee in the allowance for loan losses evaluation and determined that it is not required to reserve an allowance on SBA PPP loans at September 30, 2022 and December 31, 2021.

The following tables present net charge-offs (recoveries) as a percentage to the average loan held for investment balances in each of the loan categories for the periods indicated:

Three Months Ended September 30,
2022 2021
($ in thousands) Average Balance Net Charge-Offs (Recoveries) Percentage Average Balance Net Charge-Offs (Recoveries) Percentage
Real estate loans:
Commercial property $ 1,224,725 $ — — % $ 1,011,880 $ — — %
Residential property 278,009 — — % 198,998 — — %
SBA property 117,844 — — % 125,217 — — %
Construction 13,340 — — % 15,456 — — %
Total real estate loans 1,633,918 — — % 1,351,551 — — %
Commercial and industrial loans:
Commercial term 75,548 (2) (0.01) % 72,770 (72) (0.40) %
Commercial lines of credit 120,934 1,074 3.55 % 91,006 (10) (0.04) %
SBA commercial term 16,516 (15) (0.36) % 18,355 72 1.57 %
SBA PPP 1,409 — — % 133,544 — — %
Total commercial and industrial loans 214,407 1,057 1.97 % 315,675 (10) (0.01) %
Other consumer loans 22,557 6 0.11 % 21,242 39 0.73 %
Total $ 1,870,882 $ 1,063 0.23 % $ 1,688,468 $ 29 0.01 % Nine Months Ended September 30,
--- --- --- --- --- --- --- --- --- --- --- --- ---
2022 2021
($ in thousands) Average Balance Net Charge-Offs (Recoveries) Percentage Average Balance Net Charge-Offs (Recoveries) Percentage
Real estate loans:
Commercial property $ 1,177,792 $ — — % $ 951,325 $ — — %
Residential property 241,906 — — % 194,620 — — %
SBA property 116,063 — — % 124,797 (29) (0.03) %
Construction 10,928 — — % 14,434 — — %
Total real estate loans 1,546,689 — — % 1,285,176 (29) (0.01) %
Commercial and industrial loans:
Commercial term 73,171 (6) (0.01) % 78,666 (198) (0.34) %
Commercial lines of credit 110,338 1,074 1.30 % 91,588 (146) (0.21) %
SBA commercial term 16,480 (17) (0.14) % 20,216 (109) (0.72) %
SBA PPP 17,916 — — % 171,569 — — %
Total commercial and industrial loans 217,905 1,051 0.64 % 362,039 (453) (0.17) %
Other consumer loans 21,829 22 0.13 % 21,083 51 0.32 %
Total $ 1,786,423 $ 1,073 0.08 % $ 1,668,298 $ (431) (0.03) %

Nonperforming Loans and Nonperforming Assets

The following table presents a summary of total non-performing assets as of the dates indicated:

($ in thousands) September 30, 2022 December 31, 2021 Amount Change Percentage Change
Nonaccrual loans
Real estate loans:
Commercial property $ 2,444 $ — $ 2,444 — %
Residential property 372 — 372 — %
SBA property 552 746 (194) (26.0) %
Total real estate loans 3,368 746 2,622 351.5 %
Commercial and industrial loans:
Commercial term 3 — 3 — %
Commercial lines of credit 4,000 — 4,000 — %
SBA commercial term — 213 (213) (100.0) %
Total commercial and industrial loans 4,003 213 3,790 1,779.3 %
Other consumer loans 25 35 (10) (28.6) %
Total nonaccrual loans 7,396 994 6,402 644.1 %
Loans past due 90 days or more still on accrual — — — — %
Total nonperforming loans 7,396 994 6,402 644.1 %
Other real estate owned — — — — %
Total nonperforming assets $ 7,396 $ 994 $ 6,402 644.1 %
Nonaccrual loans to loans held-for-investment 0.38 % 0.06 %
Allowance for loan losses to nonaccrual loans 321.27 % 2,251.61 %
Nonperforming assets to total assets 0.32 % 0.05 %

The increase in total nonaccrual loans was primarily due to loans placed on nonaccrual status of $7.3 million during the nine months ended September 30, 2022, partially offset by paydowns and payoffs of $897 thousand and charge-offs of $17 thousand. The increases in nonaccrual commercial property loans and commercial lines of credit were primarily due to downgrades of loans to a single credit relationship.

Loans are generally placed on nonaccrual status when they become 90 days past due, unless management believes the loan is well secured and in the process of collection. In all cases, loans are placed on nonaccrual if collection of principal or interest is considered doubtful. Past due loans may or may not be adequately collateralized, but collection efforts are continuously pursued. Loans may be restructured by management when a borrower experiences changes to their financial condition, causing an inability to meet the original repayment terms, and where management believes the borrower will eventually overcome those circumstances and repay the loan in full. Additional income of approximately $128 thousand and $163 thousand would have been recorded during the three and nine months ended September 30, 2022, respectively, had these loans been paid in accordance with their original terms throughout the periods indicated.

Troubled Debt Restructurings

Loans that the Bank modifies or restructures where the debtor is experiencing financial difficulties and makes a concession to the borrower in the form of changes in the amortization terms, reductions in the interest rates, the acceptance of interest only payments and, in limited cases, reductions in the outstanding loan balances are classified as TDRs. TDRs are loans modified for the purpose of alleviating temporary impairments to the borrower’s financial condition. A workout plan between a borrower and the Bank is designed to provide a bridge for the cash flow shortfalls in the near term. If the borrower works through the near term issues, in most cases, the original contractual terms of the loan will be reinstated. The following table presents the composition of loans that were modified as TDRs by portfolio segment as of the dates indicated:

September 30, 2022 December 31, 2021
($ in thousands) Accruing Nonaccrual Total Accruing Nonaccrual Total
Real estate loans:
Commercial property $ 320 $ — $ 320 $ 326 $ — $ 326
SBA property 222 7 229 242 17 259
Commercial and industrial loans:
Commercial term — — — 2 — 2
SBA commercial term — — — 6 — 6
Total $ 542 $ 7 $ 549 $ 576 $ 17 $ 593

Deposits

The Bank gathers deposits primarily through its branch locations. The Bank offers a variety of deposit products including demand deposits accounts, NOW and money market accounts, savings accounts and time deposits. The following table presents a summary of the Company’s deposits as of the dates indicated:

($ in thousands) September 30, 2022 December 31, 2021 Amount Change Percentage Change
Noninterest-bearing demand deposits $ 809,842 $ 830,383 $ (20,541) (2.5) %
Interest-bearing deposits:
Savings 13,028 16,299 (3,271) (20.1) %
NOW 17,550 20,185 (2,635) (13.1) %
Retail money market accounts 522,412 386,041 136,371 35.3 %
Brokered money market accounts 10,010 1 10,009 NM
Retail time deposits of:
$250,000 or less 236,864 256,956 (20,092) (7.8) %
More than $250,000 239,271 172,269 67,002 38.9 %
Brokered time deposits 69,121 85,000 (15,879) (18.7) %
Time deposits from California State Treasurer 60,000 100,000 (40,000) (40.0) %
Total interest-bearing deposits 1,168,256 1,036,751 131,505 12.7 %
Total deposits $ 1,978,098 $ 1,867,134 $ 110,964 5.9 %
Total deposits not covered by deposit insurance $ 1,061,667 $ 919,584 142,083 15.5 %
Time deposits not covered by deposit insurance $ 217,248 $ 216,269 979 0.5 %

The decrease in noninterest-bearing demand deposits was primarily due to strong deposit market competition and the migration of a large amount of noninterest-bearing demand deposits to money market accounts and time deposits from the rising market rates. In this rising interest rate environment with a greater competition in the deposit market, the Bank started to offer higher rates on deposit products to retain customers and attract new customers.

The increase in retail time deposits was primarily due to new accounts of $480.2 million and renewals of the matured accounts of $252.2 million, partially offset by matured and closed accounts of $701.4 million.

As of September 30, 2022 and December 31, 2021, total deposits were comprised of 40.9% and 44.5%, respectively, of noninterest-bearing demand accounts, 28.5% and 22.6%, respectively, of savings, NOW and money market accounts, and 30.6% and 32.9%, respectively, of time deposits.

Deposits from certain officers, directors and their related interests with which they are associated held by the Company were $3.0 million and $3.9 million, respectively, at September 30, 2022 and December 31, 2021.

The following table presents the maturity of time deposits as of the dates indicated:

($ in thousands) Three Months or Less Three to Six Months Six Months to One Year Over One Year Total
September 30, 2022
Time deposits of $250,000 or less $ 102,175 $ 65,026 $ 129,256 $ 9,528 $ 305,985
Time deposits of more than $250,000 129,028 45,513 123,530 1,200 299,271
Total $ 231,203 $ 110,539 $ 252,786 $ 10,728 $ 605,256
Not covered by deposit insurance $ 102,956 $ 33,822 $ 79,059 $ 1,411 $ 217,248
December 31, 2021
Time deposits of $250,000 or less $ 143,594 $ 60,686 $ 129,627 $ 8,049 $ 341,956
Time deposits of more than $250,000 156,502 57,301 55,304 3,162 272,269
Total $ 300,096 $ 117,987 $ 184,931 $ 11,211 $ 614,225
Not covered by deposit insurance $ 136,219 $ 38,229 $ 38,780 $ 3,041 $ 216,269

Shareholders’ Equity and Regulatory Capital

Capital Resources

Shareholders’ equity is influenced primarily by earnings, dividends paid on common stock and preferred stock, sales and redemptions of common stock and preferred stock, and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized gains or losses, net of taxes, on securities available-for-sale.

Shareholders’ equity was $332.7 million at September 30, 2022, an increase of $76.4 million, or 29.8%, from $256.3 million at December 31, 2021. The increase was primarily due to an issuance of preferred stock of $69.1 million, net income of $26.3 million and cash proceeds from exercise of stock options of $737 thousand, partially offset by dividends declared on common stock of $6.7 million, stock repurchase of $2.2 million and a decrease in accumulated other comprehensive income of $11.2 million.

Regulatory Capital Requirements

The Bank is subject to various regulatory capital requirements administered by the federal and state banking regulators. The Company is not currently subject to separate minimum capital measurements under the definition of a “Small Bank Holding Company.” At such time as the Company reaches the $3 billion asset level, it will again be subject to capital measurements independent of the Bank.

Federal banking agencies also require a capital conservation buffer of 2.50% in addition to the ratios required to generally be considered “adequately capitalized” under the prompt corrective action (“PCA”) regulations. Failure to meet regulatory capital requirements may result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for the PCA, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.

The following table presents a summary of the capital requirements applicable to the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as the Bank’s capital ratios as of the dates indicated. For comparison purpose, the Company’s ratios are included as well, all of which would have exceeded the “well-capitalized” level had the Company been subject to separate capital minimums.

PCB Bancorp PCB Bank Minimum Regulatory Requirements Well Capitalized Requirements (Bank)
September 30, 2022
Common tier 1 capital (to risk-weighted assets) 13.69 % 16.82 % 4.5 % 6.5 %
Total capital (to risk-weighted assets) 18.34 % 18.02 % 8.0 % 10.0 %
Tier 1 capital (to risk-weighted assets) 17.14 % 16.82 % 6.0 % 8.0 %
Tier 1 capital (to average assets) 14.74 % 14.47 % 4.0 % 5.0 %
December 31, 2021
Common tier 1 capital (to risk-weighted assets) 14.79 % 14.48 % 4.5 % 6.5 %
Total capital (to risk-weighted assets) 16.04 % 15.73 % 8.0 % 10.0 %
Tier 1 capital (to risk-weighted assets) 14.79 % 14.48 % 6.0 % 8.0 %
Tier 1 capital (to average assets) 12.11 % 11.85 % 4.0 % 5.0 %

The Company and the Bank’s capital conservation buffer was 9.19% and 10.02%, respectively, as of September 30, 2022, and 8.04% and 7.73%, respectively, as of December 31, 2021.

Emergency Capital Investment Program

On May 24, 2022, the Company issued 69,141 shares of Series C Preferred Stock for the capital investment of $69.1 million from the U.S. Treasury under the ECIP. ECIP investment is treated as tier 1 capital for the regulatory capital treatment.

The Series C Preferred Stock bears no dividend for the first 24 months following the investment date. Thereafter, the dividend rate will be adjusted based on the lending growth criteria listed in the terms of the ECIP investment with the annual dividend rate up to 2%. After the tenth anniversary of the investment date, the dividend rate will be fixed based on average annual amount of lending in years 2 through 10. Dividends will be payable quarterly in arrears on March 15, June 15, September 15, and December 15.

The Series C Preferred Stock may be redeemed at the option of the Company on or after the fifth anniversary of issuance (or earlier in the event of loss of regulatory capital treatment), subject to the approval of the appropriate federal banking regulator and in accordance with the federal banking agencies’ regulatory capital regulations.

Established by the Consolidated Appropriations Act, 2021, the ECIP was created to encourage low- and moderate-income community financial institutions and minority depository institutions to provide loans, grants, and forbearance for small businesses, minority-owned businesses, and consumers, especially low-income and underserved communities, including persistent poverty counties, that may be disproportionately impacted by the economic effect of the COVID-19 pandemic by providing direct and indirect capital investments in low- and moderate-income community financial institutions.

Liquidity

Liquidity refers to the measure of ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting operating cash flow and capital and strategic cash flow needs, all at a reasonable cost. The Company continuously monitors its liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of the Company’s shareholders.

The Company’s liquidity position is supported by management of liquid assets and liabilities and access to alternative sources of funds. Liquid assets include cash, interest-bearing deposits in financial institutions, federal funds sold, and unpledged securities available-for-sale. Liquid liabilities may include core deposits, federal funds purchased, securities sold under repurchase agreements and other borrowings. Other sources of liquidity include the sale of loans, the ability to acquire additional national market non-core deposits, additional collateralized borrowings such as FHLB advances and Federal Reserve Discount Window, and the issuance of debt securities and preferred or common securities.

The Company’s short-term and long-term liquidity requirements are primarily to fund on-going operations, including payment of interest on deposits and debt, extensions of credit to borrowers, capital expenditures and shareholder dividends. These liquidity requirements are met primarily through cash flow from operations, redeployment of prepaying and maturing balances in loan and investment securities portfolios, increases in debt financing and other borrowings, and increases in customer deposits.

Integral to the Company’s liquidity management is the administration of borrowings. To the extent the Company is unable to obtain sufficient liquidity through core deposits, the Company seeks to meet its liquidity needs through wholesale funding or other borrowings on either a short or long-term basis.

The following table presents a summary of the Company’s liquidity position as of the dates indicated:

($ in thousands) September 30, 2022 December 31, 2021 Amount Change Percentage Change
Cash and cash equivalents $ 154,038 $ 203,285 $ (49,247) (24.2) %
Cash and cash equivalents to total assets 6.6 % 9.5 %
Available borrowing capacity:
FHLB advances $ 586,125 $ 516,158 69,967 13.6 %
Federal Reserve Discount Window 29,065 29,198 (133) (0.5) %
Overnight federal funds lines 65,000 65,000 — — %
Total $ 680,190 $ 610,356 $ 69,834 11.4 %
Total available borrowing capacity to total assets 29.2 % 28.4 %

The Company also maintains relationships in the capital markets with brokers and dealers to issue time deposits and money market accounts.

PCB Bancorp, on a stand-alone holding company basis, must provide for its own liquidity and its main source of funding is dividends from the Bank. There are statutory, regulatory and debt covenant limitations that affect the ability of the Bank to pay dividends to the holding company. Management believes that these limitations will not impact the Company’s ability to meet its ongoing short- and long-term cash obligations.

Off-Balance Sheet Activities and Contractual Obligations

Off-Balance Sheet Arrangements

The Company has limited off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on financial condition, results of operations, liquidity, capital expenditures or capital resources.

In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of its customers. These financial commitments include commitments to extend credit, unused lines of credit, commercial and similar letters of credit and standby letters of credit. Those instruments involve to varying degrees, elements of credit and interest rate risk not recognized in the Company’s financial statements.

The Company’s exposure to loan loss in the event of nonperformance on these financial commitments is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for loans reflected in the consolidated financial statements.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Company evaluates each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary is based on management’s credit evaluation of the customer. The following table presents outstanding financial commitments whose contractual amount represents credit risk as of the dates indicated:

September 30, 2022 December 31, 2021
($ in thousands) Fixed Rate Variable Rate Fixed Rate Variable Rate
Unused lines of credit $ 55,173 $ 199,565 $ 8,261 $ 160,739
Unfunded loan commitments 847 35,822 595 29,688
Standby letters of credit 3,093 1,701 3,078 1,431
Commercial letters of credit 112 190 91 524
Total $ 59,225 $ 237,278 $ 12,025 $ 192,382

Contractual Obligations

The following table presents supplemental information regarding total contractual obligations as of the dates indicated:

($ in thousands) Within One Year One to Three Years Three to Five Years Over Five Years Total
September 30, 2022
Time deposits $ 594,528 $ 10,517 $ 211 $ — $ 605,256
Operating leases 3,099 2,474 1,472 920 7,965
Total $ 597,627 $ 12,991 $ 1,683 $ 920 $ 613,221
December 31, 2021
Time deposits $ 603,014 $ 10,850 $ 361 $ — $ 614,225
FHLB advances 10,000 — — — 10,000
Operating leases 2,706 3,023 1,235 710 7,674
Total $ 615,036 $ 13,873 $ 1,596 $ 710 $ 631,899

Management believes that the Company will be able to meet its contractual obligations as they come due through the maintenance of adequate cash levels. Management expects to maintain adequate cash levels through profitability, loan and securities repayment and maturity activity and continued deposit gathering activities. The Company has in place various borrowing mechanisms for both short-term and long-term liquidity needs.

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss due to changes in market values of assets and liabilities. Market risk occurs in the normal course of business through exposures to market interest rates, equity prices, and credit spreads.

Overview

Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities (repricing risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay residential mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and LIBOR (basis risk).

The Company’s Board asset liability committee (“Board ALCO”) establishes broad policy limits with respect to interest rate risk. Board ALCO establishes specific operating guidelines within the parameters of the Board of Directors’ policies. In general, The Company seeks to minimize the impact of changing interest rates on net interest income and the economic values of assets and liabilities. Board ALCO meets quarterly to monitor the level of interest rate risk sensitivity to ensure compliance with the Board of Directors’ approved risk limits. As discussed earlier, the Company also has a Management ALCO, which is comprised of the senior management team and Chief Executive Officer. Management ALCO meets monthly and is responsible for reviewing the Company’s open market positions and establishing polices to monitor and limit exposure to market risk.

Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.

An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on interest-earning assets would reprice upward more quickly than rates paid on interest-bearing liabilities, thus expanding net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as rates paid on interest-bearing liabilities would reprice upward more quickly than rates earned on interest-earning assets, thus compressing net interest margin.

Measurement

Interest rate risk exposure is measured and monitored through various risk management tools, which include a simulation model that performs interest rate sensitivity analyses under multiple interest rate scenarios. Interest rate risk measurement is calculated and reported to the Board ALCO at least quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.

The Company uses two approaches to model interest rate risk: Net Interest Income at Risk (“NII at Risk”), and Economic Value of Equity (“EVE”). Under NII at Risk, net interest income is modeled utilizing various assumptions for assets, liabilities, and derivatives. The Company uses a static balance sheet to perform these analyses. EVE measures the period end market value of assets minus the market value of liabilities and the change in this value as rates change. EVE simulation reflects the effect of interest rate shifts on the value of the Company. In contrast to NII simulation, EVE simulation identifies risks arising from repricing or maturity gaps over the life of the balance sheet. The EVE approach provides a comparatively broader scope than the NII at Risk approach since it captures all anticipated cash flows.

The following table presents the projected changes in NII at Risk and EVE that would occur upon an immediate change in interest rates based on independent analysis, but without giving effect to any steps that management might take to counteract that change as of the dates indicated:

September 30, 2022 December 31, 2021
Simulated Rate Changes Net Interest Income Sensitivity Economic Value of Equity Sensitivity Net Interest Income Sensitivity Economic Value of Equity Sensitivity
+300 9.7 % (1.2) % 26.2 % 14.0 %
+200 6.8 % 0.3 % 17.5 % 10.6 %
+100 3.7 % 0.7 % 8.7 % 6.2 %

Item 4 - Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Act”), as of September 30, 2022 was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2022, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is: (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure; and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Act) that occurred during the three months ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 1 - Legal Proceedings

In the normal course of business, the Company is involved in various legal claims. Management has reviewed all legal claims against the Company with counsel and have taken into consideration the views of such counsel as to the potential outcome of the claims in determining the accrued loss contingency. The Company did not have any accrued loss contingencies for legal claims at September 30, 2022. It is reasonably possible the Company may incur losses in addition to the amounts currently accrued. However, at this time, the Company is unable to estimate the range of additional losses that are reasonably possible because of a number of factors, including the fact that certain of these litigation matters are still in their early stages and involve claims for which, at this point, the Company believes have little to no merit. Management has considered these and other possible loss contingencies and does not expect the amounts to be material to the consolidated financial statements.

Network and Data Incident

On August 30, 2021, the Bank identified unusual activity on its network. The Bank responded promptly to disable the activity, investigate its source and monitor the Bank’s network. The Bank subsequently became aware of claims that it had been the target of a ransomware attack. On September 7, 2021, the Bank determined that an external actor had illegally accessed and/or acquired certain data on its network. The Bank has been working with third-party forensic investigators to understand the nature and scope of the incident and determine what information may have been accessed and/or acquired and who may have been impacted. The investigation revealed that this incident impacted certain files containing certain Bank customer information. Some of these files contained documents related to loan applications, such as tax returns, Form W-2 information of their employees, and payroll records. The Bank has notified all individuals identified as impacted, consistent with applicable laws. All impacted individuals were offered free Equifax Complete Premier credit monitoring and identify theft protection services. The Bank has notified law enforcement and appropriate authorities of the incident.

On December 16, 2021, Plaintiff Min Woo Bae, individually and on behalf of all others similarly situated, filed in the Los Angeles County Superior Court a complaint based on the incident for damages, injunctive relief, and equitable relief, styled Min Woo Bae v. Pacific City Bank, Case Number 21STCV45922 (“the Matter”). In the Matter, Plaintiff seeks to form a class action and alleges causes of action for: (1) negligence; (2) unjust enrichment; (3) violations of California’s Consumer Privacy Act, Civil Code § 1798.150(a); and (4) violations of California’s unfair competition law (Cal. Bus. & Prof. Code § 17200, et seq.). The summons and complaint have been served on the Bank as of the date of this submission. The Bank expresses no opinion on the merits of the Matter and intends to answer, respond, and/or otherwise defend itself from the claims and causes of action asserted in the complaint to the fullest extent permitted by applicable law. Those defenses will be based in part on the fact that the Bank has implemented security procedures, practices, and a robust information security program pursuant to guidance from the applicable financial regulators.

The Company continues to monitor and evaluate the data incident for its magnitude and concomitant financial, legal or reputational consequences. To date, such consequences are not material, however the data incident is still recent and notices to affected individuals only recently began and the lawsuit mentioned above is in its very early stages. During the year ended December 31, 2021, expenses associated with the data incident totaled $100 thousand, which represents the retention amount on its insurance claims. There were no additional expenses associated with the data incident during the three and nine months ended September 30, 2022. The Company anticipates additional expenses will be incurred in future periods; however, the Company does have a cyber-liability insurance policy that should provide insurance coverage for this incident.

Item 1A - Risk Factors

Management is not aware of any material changes, other than the noted above, to the risk factors that appeared under “Part I, Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part 1, Item 1A, of the Annual Report on Form 10-K for the year ended December 31, 2021, which could materially and adversely affect the Company’s business, financial condition, results of operations and stock price. The risks described in this Quarterly Report on Form 10-Q and in the Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not presently known to management or that management presently believes not to be material may also result in material and adverse effects on the Company’s business, financial condition, and results of operations.

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

Except for the preferred stock discussed below, there were no unregistered sales of equity securities during the three and nine months ended September 30, 2022.

On May 24, 2022, the Company issued 69,141 shares of Series C Preferred Stock for the capital investment of $69.1 million from the U.S. Treasury under the ECIP. For additional information, see Note 9 to the Consolidated Financial Statements (Unaudited) included in Item 1 of this Quarterly Report on Form 10-Q.

The following table presents share repurchase activities during the periods indicated:

($ in thousands, except per share data) Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Program Number of Shares That May Yet Be Purchased Under the Program
From July 1, 2022 to July 31, 2022 — $ — — 747,938
From August 1, 2022 to August 31, 2022 15,942 18.97 15,942 731,996
From September 1, 2022 to September 30, 2022 103,999 18.72 103,999 627,997
Total 119,941 $ 18.75 119,941

On April 8, 2021, the Company’s Board of Directors approved a repurchase program authorizing the repurchase of up to 5% of the Company’s outstanding common stock as of the date of the board meeting, which represented 775,000 shares, through September 7, 2021. The Company repurchased and retired 680,269 shares of common stock at a weighted-average price of $15.99 per share under this repurchase program.

On July 28, 2022, the Company’s Board of Directors approved a repurchase program authorizing for the repurchase of up to 5% of the Company’s outstanding common stock as of the date of the board meeting, which represented 747,938 shares, through February 1, 2023. The Company repurchased and retired 119,941 shares of common stock at a weighted-average price of $18.75 per share, totaling $2.2 million under this repurchase program as of September 30, 2022.

Item 3 - Defaults Upon Senior Securities

None.

Item 4 - Mine Safety Disclosures

Not applicable.

Item 5 - Other Information

None

Item 6 - Exhibits

Exhibit Number Description Form File No. Exhibit Filing Date
3.1 Articles of Incorporation of PCB Bancorp, as amended 10-Q 001-38621 3.1 August 8, 2019
3.2 Bylaws of PCB Bancorp 8-K 001-38621 3.2 July 2, 2019
3.3 Certificate of Determination for Senior Non-Cumulative Perpetual Preferred Stock, Series C 8-K 001-38621 3.1 May 24, 2022
4.1 Specimen common stock certificate of PCB Bancorp 10-Q 001-38621 4.1 August 8, 2019
4.2 Description of Capital Stock 10-Q 001-38621 4.2 August 4, 2022
4.3 Form of Certificate for Senior Non-Cumulative Perpetual Preferred Stock, Series C 8-K 001-38621 4.1 May 24, 2022
10.1 Employment Agreement, dated January 1, 2018, between Pacific City Financial Corporation and Henry Kim S-1 333-226208 10.1 July 17, 2018
10.1A First Amendment to Employment Agreement, dated August 26, 2021, among PCB Bancorp, Pacific City Bank and Henry Kim 10-Q 001-38621 10.1A November 8, 2021
10.1B Second Amendment to Employee Agreement, dated December 28, 2021, among PCB Bancorp, Pacific City Bank and Henry Kim 10-K 001-38621 10.1B March 4, 2022
10.2 2013 Equity Based Compensation Plan, as amended S-1 333-226208 10.2 July 17, 2018
10.3 Form of Stock Option Award Agreement under 2013 Equity Based Compensation Plan S-1 333-226208 10.3 July 17, 2018
10.4 Form of Restricted Stock Award Agreement under 2013 Equity Based Compensation Plan S-1 333-226208 10.4 July 17, 2018
10.5 2003 Pacific City Bank Stock Option Plan, as amended S-1 333-226208 10.5 July 17, 2018
10.6 Form of Stock Option Award Agreement under the 2003 Pacific City Bank Stock Option Plan S-1 333-226208 10.6 July 17, 2018
10.7 Letter Agreement, dated May 24, 2022, between PCB Bancorp and the U.S. Department of Treasury, with respect to the issuance of Senior Non-Cumulative Perpetual Preferred Stock, Series C 8-K 001-38621 10.1 May 24, 2022
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
101.INS The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH Inline XBRL Taxonomy Extension Schema Document*
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document*
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document*
104 Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101)*

* Filed herewith

** Furnished herewith

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PCB Bancorp
Date: November 3, 2022 /s/ Henry Kim
Henry Kim
President and Chief Executive Officer<br><br>(Principal Executive Officer)
Date: November 3, 2022 /s/ Timothy Chang
Timothy Chang
Executive Vice President and Chief Financial Officer<br><br>(Principal Financial and Accounting Officer)

68

Document

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Henry Kim, certify that:

1.I have reviewed this periodic report on Form 10-Q of PCB Bancorp;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this reports;

4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;

(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and

(d)disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the Audit Committee of the Registrant’s Board of Directors (or persons performing the equivalent functions):

(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: November 3, 2022 /s/ Henry Kim
Henry Kim
President and Chief Executive Officer<br><br>(Principal Executive Officer)

Document

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Timothy Chang, certify that:

1.I have reviewed this periodic report on Form 10-Q of PCB Bancorp;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this reports;

4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;

(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and

(d)disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the Audit Committee of the Registrant’s Board of Directors (or persons performing the equivalent functions):

(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: November 3, 2022 /s/ Timothy Chang
Timothy Chang
Executive Vice President and Chief Financial Officer<br><br>(Principal Financial and Accounting Officer)

Document

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the periodic report of PCB Bancorp (the “Company”) on Form 10-Q for the period ended September 30, 2022, as filed with the Securities and Exchange Commission (the “Report”), I, Henry Kim, Chief Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that:

(1)the Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

Date: November 3, 2022 /s/ Henry Kim
Henry Kim
President and Chief Executive Officer<br><br>(Principal Executive Officer)

Document

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the periodic report of PCB Bancorp (the “Company”) on Form 10-Q for the period ended September 30, 2022, as filed with the Securities and Exchange Commission (the “Report”), I, Timothy Chang, Chief Financial Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that:

(1)the Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

Date: November 3, 2022 /s/ Timothy Chang
Timothy Chang
Executive Vice President and Chief Financial Officer<br><br>(Principal Financial and Accounting Officer)

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